MTY Food Group to Buy Imvescor at $248-million 6

Wow. What a day! MTY is trying to pull off another mega deal…

After buying Kahala brands for about US$310 million (about $400 million in CDN) not so long ago, MTY is doing it again.

MTY just released a news this morning that they will buy Imvescor, a publicly traded restaurants chains such as Baton Rouge, PIzza Delight, Mikes, Scores, Ben and Florentine and Commensa at $248 million- about $50 million in cash and $200 million in MTY stock issuance. For those who do not know Imvescor, check outtheir website.

This time, MTY share is down by 5% whereas it was up like 20-30% on Kahala acquisition. What’s also interesting is Imvescor’s share is down as well… Haha. In typical acquisitions, acquirer share is down because they normally pay premium and acquiree share hovers around the price that the acquirer pays for.

I am not artistic enough to understand how markets work so I will stick to the fundamentals and very little artistic talent I have.

Remember?-a well known finance columnist Morgan Housel said 

Measuring what worked in the past is a science. Understanding why things are different now is an art.

Anyway… Let’s look at their chart… Very impressive… Isn’t it?

Check out their presentation here. Not too bad!

I have been to Pizza delight once when I was in Halifax and it was actually pretty delicious but pizza industry is probably the most competitive restaurant segment in North America being dominated by Domino, Pizza hut, Papa Jones and countless of small pizza chains and local pizza stores.

They also have Baton Rouge which I have never been to but I have noticed several locations in Toronto that seemed to be crowded.

I never heard of the other 4 chains that Imvescor owns…

When you look at their fundamentals, I am not a big fan either…

They did not grow much on free cash flow. It actually stagnated. In 2012, its free cash flow per share was 0.23 and in 2017 it is 0.25… Not really exciting there.

It has been issuing shares quite aggressively from 40 millions in 2012 to current 60 millions. I hate dilution.. Not a great feeling when someone takes a portion of your pie.

Their earnings have grown quite a bit but I like the business that net earnings and free cash flows grow together instead of just net earnings.

Their revenue has grown from $47 million to $53 million last 5 years so that’s pretty bad throughout. How should I accept it when your share count basically grew by 50% but your revenue only grew by 10%?

Fundamentals are just ok or let me rephrase it.I would not include Imvescor as one of 20 slots regardless of its quite amazing stock performance.

That being said,

There are several things that I really like about Imvescors

1. Their same store sales growth.

They call it- Same Restaurant Sales Growth (SRS), the most important key indicator of restaurant is up at least 8 consecutive quarters… Look at the growth.

2.4%, 2.9%, 1.2%, 1.2%, 0.4%, 1.0%, 2.4%, 4.9%!

What’s happening with the restaurants? I am sure Stanley Ma from MTY will be all over the executives of Imvescor trying to understand how Imvescor team pulled off 8 consecutive quarters of SRS growth! That is truly remarkable…

2. Maritime and French Canada presence

I remember Pizza delight is huge in Maritime provinces- New Brunswick, Nova Scotia, New foundland.

Baton Rouge and Mike’s and others are pretty big in Montreal and Quebec which are close to MTY’s head office.

That will allow MTY to expand while closely monitoring them throughout the provinces where MTY’s restaurant presence is small.

3. Synergy

When it comes to MTY’s acquisitions, it is really all about synergy. Stanley Ma is quite genius in controlling costs and convert them into free cash flows… Yeah the most important thing that will help MTY keep acquiring restaurants after restaurants… You saw it happen year after year… This won’t end…

The scale is just getting bigger (Purchasing power increase in buying food materials, leasing locations, network etc…) while minimizing risks of food poisoning from any one brand or location thanks to countless brands MTY owns… Think about Chipotle’s food poisoning outbreak which decimated its stock price from all time high of $750 to recent low of $280 or so…

I kinda like and hate the deal at the same time.

I am not a big fan on the fact that MTY is buying ok business with ok management except the talent they had in growing same store sale which may explain their low growth in free cash flow as they may have been heavily investing in renovating the restaurants.

I dislike that MTY will have to issue around 3.7- 4 million shares to fund the acquisition even though MTY’s share price is almost all time high. MTY’s cash flow multiple is very attractive now so giving up shares at this time for me isn’t prudent.

I like the size of the acquisition instead of many small acquisitions as big one like this could be less costly and could really give a huge boost(think about the Kahala acquisition)

I also like the fact that this does not involve broker or syndicates of banks and investors to raise funds so saving fortunes from fees.

I am sure many spoiled management of Imvescors will have to follow frugal nature of Stanley Ma so very minimal options issuance with very low salary are expected or they will leave and Stanley’s executive team will take over.

To sum up.

I like the deal a lot but I hate the dilution even if it is accretive and that may be the reason for today’s selloff. Think about it. MTY never issued shares for last 10 years except Kahala deal and this one… But who I am to question Stanley’s capital allocation and acquisition decision?

Someone already shoot me an email today asking whether I sold some of MTY or not. What did I do today during the selloff?

I bought some more. I did not have much available cash (saving up for TFSA room next year) so I deployed very little on today’s selloff to make me feel better 🙂

Hopefully Imvescor shareholders approve the deal. A major shareholder and management who holds 18% of the company is supportive so I think the deal will go through which is expected to happen in March 2018. Yay!

What did you think about the acquisition? Good one or Bad one?

I previously wrote about MTY Food Group.

MTY Food Group= Frugal CEO with high ownership + Growing free cash flow + Minimal dilution

MTY Food group up 6.44% hitting all time high

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6 thoughts on “MTY Food Group to Buy Imvescor at $248-million

  • MoneyValueTime

    I bought more today as well. It’s now my second largest single stock holding after Trupanion. I don’t mind the dilution… MTY shares were valued at a decent multiple of EBITDA so he is essentially using a premium priced “currency” to make what should prove to be an accretive purchase. Stanley will then drive costs out of the acquired operations as you said, the EV/EBITDA multiple should re-rate driving the share price UP, and hopefully he repeats this compounding cycle over and over again.

    In terms of capital allocation, this is exactly what Henry Singleton did with Teledyne shares (he repurchased them when cheap, and issued them when expensive) and is a hallmark of good capital allocation. Now if MTY shares were depressed, then yes that would have been a poor allocation decision.

    • Be Smart Rich Post author

      Interesting. I read about Henry Singleton on Teledyne which was facinating. I really liked his classical moves in getting things cheap.
      Yeah, I agree. MTY’s share was all time high so I did not think Stanley was making a mistake issuing shares to acquiring major restaurants brands and I am confident that he will consolidate the businesses quite well. Dilution still does not make me that happy considering the free cash flow multiples of MTY was cheap on a relative basis but it is ok. Hope the deal go through without an issue. Hope the majority of small shareholders ignore the voting letter and move on with their lives.

  • Frédéric

    I don’t really like the fact that he uses so much share emission for this acquisition. There will be a 17-18% dilution which is a lot! What’s your thought about this?