Fri 3rd Oct 2014 - Douglas Jack - Prezzo approach may flush out higher bids Douglas Jack - Prezzo approach may flush out higher bids: Numis Securities leisure analyst Douglas Jack has argued that the preliminary approach to buy Prezzo by private equity companies Advent International and TPG Capital may flush out a higher bid. He said: “Indications are that any offer is unlikely to be at a premium to 135p/share. In our view, this proposed price is unattractive, but announcing the approach may flush out higher bids. Prezzo’s announcement was not “made with the agreement or approval of Advent International Plc or TPG Capital LLP” and the board has made no recommendation to shareholders. This implies that the process is still at an early stage. Advent and TPG have until 5.00pm on 30 October 2014 to either announce a firm intention to make an offer or withdraw. Being on the public market does not appear to serve an obvious purpose for Prezzo, with members of the Kaye family owning almost two-thirds of its equity. Although some shareholders might be able to roll their equity interest into a private company, we believe those institutional shareholders that are unable to hold private equity would find a nil-premium 135p/share cash-takeout unattractive. Prezzo shares were trading at 162p/share as recently as March 2014, since when the company has reported a 16% increase in H1 PBT. The 2010-13 earnings CAGR was also 16%, in comparison to which 135p/share would equate to 16.4x P/E and 8.7x EV/Ebitda (2015E) for a company with an £8m net cash position and an 11% freehold estate. The valuation of £1.2m/restaurant compares to The Restaurant Group’s current valuation of £2.6m/restaurant. A 9.4x EV/Ebitda (2014E) take-out multiple would arrest a trend of growing exit multiples for restaurants going private: from ASK Central’s 7.3x in 2004; Gondola’s 8.9x in 2006; La Tasca’s 11.0x in 2007; to Carluccio’s 11.5x in 2010. In comparison, Prezzo’s rating recently peaked at 11.7x EV/Ebitda (22x P/E). The current share price assumes no counter-bid, but we would not entirely rule out the possibility. Even before this approach, corporate activity had returned to 2007 levels this year, both in number of outlets changing hands and Ebitda multiples (averaging slightly over 10x), with private equity heavily involved.” Nick Batram, of Peel Hunt, said: “A bid approach around the current share price significantly undervalues a group of Prezzo’s pedigree and potential. The Kaye family’s majority shareholding is clearly an important factor and creates an element of uncertainty for independent shareholders. Nevertheless, with Prezzo firmly in play, the downside from here looks limited; hence we retain our Buy recommendation. At 135p, Prezzo is valued at c8x our 2015E forecast Ebitda. For a company of Prezzo’s track record and prospects, we would expect a take-out multiple closer to 10x (165p). Prezzo is a well-managed, well-capitalised business and not a distressed asset. The Kaye family holds c60% of the equity and will clearly play an important role in any outcome. However, shareholders should firmly reject any bid that fails to offer a decent premium to the current share price.”