The restructuring of a fast-food operator Famous Brands’ UK-based Gourmet Burger Kitchen (GBK) passed an important milestone when its creditors approved the group’s turnaround plan.
Famous Brands bought GBK for £120m in 2016, but its poor performance has led it to write down R874m.
When it bought GBK and its 97 stores from Nandos, the move was widely approved, but the slowdown in the economy, along with the uncertainty created by the UK’s decision to leave the EU created a hostile trading environment.
The premium burger market had also become overtraded. The group acknowledged that operating issues such as “sub-optimal management capacity” resulted in its underperformance.
In an effort to turn around its struggling UK operation, Famous Brands announced in October that it was going through a company voluntary arrangement (CVA) process, with the assistance of Grant Thornton.
A CVA allows a company to restructure by negotiating with its creditors. Famous Brands negotiated its property portfolio so it could “be in line with current market valuations”.
The CVA process gave its creditors 28 days to challenge the restructuring proposals. As no objections were raised during the period, GBK went ahead with shutting down 14 of the 17 severely underperforming restaurants.
The other three sites earmarked to close have improved their performance and are staying open, but remain under review.
Famous Brands made a big mistake in taking control of a business that operated very differently from itself, said Gryphon research analyst and portfolio manager Casparus Treurnicht.
“Famous Brands was used to a franchisee-type of business. The first mistake was not grasping that running corporate-owned restaurants were a completely different game than franchising.”
Treurnicht said its second mistake was believing it was “going to make it in the UK” after so many other South African businesses struggled to make it abroad.
Famous Brands said the CVA process has positioned GBK to improve its performance because its existing debt has been refinanced, and the restructuring gave it a debt profile that is better aligned to its operational requirements.
Treurnicht however, was not sold on the idea it could turn itself around. “I think restructuring is a synonym for trying harder and losing more.”
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