Leisure and gaming company Grand Parade Investments (GPI) said on Wednesday that it will use the proceeds of the sale of its Burger King licence to pay a special dividend to shareholders, part of a strategy to reduce a steep discount to its net asset value (NAV) per share.
The price of the sale to private equity fund Emerging Capital Partners (ECP) Africa Fund IV has yet to be determined. GPI said in December that it was seeking to offload the franchise for which it had paid about R700m.
The sale price in the binding offer will be based on Burger King SA’s enterprise value, or R670m based on a ratio of eight times forward earnings before interest, taxation, depreciation and amortisation (ebitda). GPI will receive 95.36%, though in the determination of the sale price the debt of the enterprise will be subtracted and excess cash added.
The Grand Foods Meat Plant will accompany the sale of Burger King SA and is valued at R27m.
GPI, which opened the first Burger King outlet in SA in 2013, has endured several years of underperformance from the fast-food chain, which reported its first profit in the 2019 financial year. GPI CEO Mohsin Tajbhai said in a statement on Wednesday that the group believes the market had undervalued Burger King SA.
“Our focus is on maximising value for our shareholders, many of which have been with us from inception,” Tajbhai said. “GPI has historically traded at a significant discount to the value of its underlying assets.”
The discount of share price to intrinsic NAV is seen as the best measure of how well an investment company is faring. GPI has been disposing of assets, including Dunkin Donuts and Baskin-Robbins in 2019, as well as its stake in Spur.
Tajbhai said on Wednesday that the discount had fallen from more than 40% to between 20% and 30% after a two-year focus on reducing it.
An enterprise value of eight times ebitda, in what is a challenging domestic fast-food sector, seems fair given the low profitability of Burger King and the need for further investment in order for Burger King to reach its potential, said SmallTalkDaily’s Anthony Clark.
Activist shareholders have, for some years put, pressure on GPI, after some forays into the food business that were unsuccessful, said Clark.
“Given the success of activists at Grand Parade and the unlocking of value, management at other such holding companies with material sizable discounts to NAV better be looking over their shoulders,” he said.
ECP said on Wednesday that it has raised $3.2bn (R48bn) in capital, and has completed more than 60 transactions. It has two other investments in SA — both in the fintech sector.
In morning trade on Wednesday, GPI’s share price was up 9.09% to R3.60, putting it on track for its best day in almost four months.
With Siseko Njobeni
Update: 19 February 2020
This article has been updated with additional comment and share price information.
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