FIFTH RIGHTS ISSUE
Taste plans to raise more than its market capitalisation
Taste Holdings, the fast-food franchising group that holds the local rights to global brands such as Starbucks and Domino’s, will raise more than its market capitalisation when embarking on its fifth rights issue in slightly more than three years.
On Thursday, Taste detailed proposals for a rights issue to raise R398m — underwritten by US-based Riskowitz Value Fund, which is already a large shareholder in Taste. The rights offer will be pitched at 90c/share — a 14% premium to Taste’s closing share price on Wednesday.
The rights issue proposal will mean that Taste has raised about R1bn of new capital in the market in less than four years. The amount to be raised in the latest rights issue is more than the company’s market capitalisation of about R353m.
The company, which listed in 2006 with a small private placement of R22.5m, also raised R180m in August 2014, R95m in April 2015, R226m in late 2015 and R120m in May.
The possibility of a sizeable rights offer was signalled earlier in 2017, when Taste was unable to sell off its noncore jewellery franchising operations for an acceptable price. Directors had indicated that the board of directors was evaluating alternatives to settle its debt.
The sale of the jewellery division would have allowed Taste to settle its long-term bond debt of R225m and mobilise any surplus cash to fund the pizza brand Domino’s and coffee brand Starbucks.
Vunani Securities analyst Anthony Clark predicted a large number of Taste shareholders would not follow their rights at a premium-priced 90c a share.
"This cash is needed as a desperate measure to repay R225m of bonds," Clark said.
But on Thursday, Taste was still talking optimistically, reiterating that the continued roll-out of Starbucks and Domino’s stores was necessary for the food division to achieve earnings before interest, tax, depreciation and amortisation profitability.
It contended that the expected "moderate consumer recovery" in 2018 would position the food division to achieve a monthly cash breakeven in the second half of the year.
Lentus Asset Management chief investment officer Nic Norman-Smith said the Taste rights offer coincided with a difficult trading environment for fast food companies.
"It’s not the kind of [trading] environment that makes for attractive future returns.… A prolonged boom period in this segment of the consumer sector tends to lead to a lot of new competition, which drives down profitability. And on top of that, you now have weaker demand."
In the half-year to end-August, Taste posted a bottom line loss of R65m.
But CEO Carlo Gonzaga said at the time that Domino’s and Starbucks had performed acceptably, with Domino’s managing a 1% increase in same-store sales and Starbucks stores individually beating the 25% internal rate of return hurdle.
Gonzaga also stressed that the benefits of growing slowly in Starbucks were paying off.
Two new Starbucks stores were opened in August 2017, with a further four openings expected by year’s end to bring the number of outlets to 10.
Gonzaga was unavailable for a comment on Thursday.