Thu 6th Nov 2014 - Analysts – Prezzo bid undervalues the company Analysts – Prezzo bid undervalues the company: Two senior leisure analysts have argued that this morning’s recommended cash bid by TPG for Prezzo undervalues the company. Peel Hunt leisure analyst Nick Batram has argued that independent shareholders should reject the cash bid for Prezzo since it ‘fundamentally’ undervalues the business. He said: “Papa Bidco, a newly incorporated business indirectly owned by TPG Funds, is making an agreed cash offer at 126.5p, valuing Prezzo at £303.7m. The board of Prezzo has unanimously recommended the offer, with Papa receiving irrevocable (binding even in the event of a higher offer) acceptances of 62.33% – predominantly the Kaye family. The offer price represents an EV/Ebitda multiple of c8.7x to Dec 2014E, falling to 7.6x Dec 2015E, based on our forecasts. This represents a c20% discount to the Restaurant Group. The reason given for accepting the bid is the risk to the business and the share price if the Kaye family were to exit through the public markets. There is also some comment on the requirements of developing the business to take it to the next level. These are both valid concerns/challenges. However, independent shareholders should still feel disappointed at the level of discount for a business with an impressive track record and attractive future prospects. There is no doubt in our minds that TPG has secured Prezzo at a very attractive price – great news for TPG investors, not so good for independent shareholders. However, history has shown that independent shareholders that have been able to hold unquoted equity have done well rejecting unattractive bids in the past (Fitness First is a good example). Therefore, for those that can, we would reject the bid. In our opinion, the agreed bid of 126.5p fundamentally undervalues a business with an impressive track record and exciting prospects. We appreciate the risks of the family exiting and TPG have been very cute and picked up a good business at an attractive price. However, independent shareholders should be disappointed at the exit price and, for those that can hold unquoted equity, they should reject the bid.” Numis Securities analyst Douglas Jack said the offer is a ‘disappointing’ one. He said: “Prezzo’s board has agreed to and recommended a 126.5p/share cash offer from TPG, which values the company at 8.6x December 2014E. This compares to The Restaurant Group’s (Buy; TP 760p) 11.6x EV/Ebitda valuation. TPG requires the approval of one-third of the non-family/directors’ vote in order to achieve the required 75% acceptance target in order to de-list the shares. In our view, the shares should de-list, but not at this price. The 126.5p/share offer is 22% below Prezzo’s 162p share price in March 2014. Since then, the company has reported a 16% increase in H1 PBT. The 2010-13 earnings CAGR was also 16%.The offer values Prezzo’s equity at below £1.2m/restaurant, which compares to The Restaurant Group’s £2.8m/restaurant. Prezzo’s average Ebitda/restaurant is £130k, whereas The Restaurant Group’s is slightly over £250k. Both companies have freeholds accounting for c.10% of their outlets. Prezzo has a small net cash position; The Restaurant Group has a small net debt position. An 8.6x 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). In our view, this is a disappointing outcome for other shareholders. For the company to de-list, at least 75% of the votes cast at the General Meeting must approve this offer, requiring the approval of 33.7% of the non-family/directors vote. We expect many of these shareholders to conclude that this cash offer does not fully reflect the value and future prospects of the business.”