September 7 2007 - Retail Food Group Limited ('RFG') today announced that it had entered into a conditional Scrip & Cash Terms Agreement ('SCTA') to acquire all the issued shares in The Michel's Group Australia Pty Ltd ('TMGA'). TMGA is the intellectual property owner and manager
of the Michel's Patisserie franchise system ('Michel's'), a well known Australian food retailer which specializes in the sale of cake, coffee and patisserie related products.
Currently Michel’s have a total of 340 franchised outlets in Australia, and a further 6 franchised outlets in New Zealand. Upon completion of the transaction and following RFG’s recent acquisition of the 321 store Brumby’s Bakeries franchise system, the total number of franchised outlets under the stewardship of RFG will exceed 1,020 outlets, making RFG one of the largest retail food franchisors in Australia and the largest by a considerable margin with respect to “home grown” retail food franchise concepts.
The acquisition is anticipated to be completed by the end of November 2007, however pursuant to the SCTA RFG will be entitled to the whole of TMGA’s FY2008 earnings (after deduction of interest on TMGA’s existing debt) from 1 July 2007.
The consideration payable to TMGA shareholders is $50 million cash and a scrip component being subject to an incentivated earn-out program based on TMGA FY2008 adjusted EBIT performance. TMGA shareholders will be entitled to be issued with RFG scrip on a pro rata basis where TMGA’s adjusted FY2008 EBIT is between $13.25 million and $18 million.
Assuming full entitlement to the earn-out the maximum value of the consideration payable is $88 million with any scrip entitlement being issued on the earlier of the finalisation of the FY2008 audited accounts or 30th October 2008.
TMGA also has debt of approximately $56 million which will either remain with the company on completion of the SCTA or be refinanced by RFG.
RFG provided FY2008 guidance on the 29th August detailing a forecast increase in EBIT of 55% to $19 million and an increase in NPAT to $9.8 million (an increase of 30%).
Prior to factoring synergies, efficiencies and integration savings which would be achievable from the incorporation of Michel’s into RFG’s management and operational service structure, RFG expects that the successful completion of the TMGA transaction would result in revised FY2008 guidance of $32 million in EBIT, an increase of approximately $20 million or 167% on FY2007.
Additionally, while RFG is confident that the TMGA acquisition will be earnings per share (EPS) accretive in FY2008, the quantum of such increase will depend upon the funding structure adopted and the scrip issue as a consequence of the earn-out.
The acquisition is subject to a number of conditions including shareholder approval, ASX not objecting to the terms of performance shares which will be issued in connection with the scrip component of the consideration and satisfactory completion of RFG’s current due diligence enquiries.
The agreement is also conditional on RFG obtaining financing on terms which are satisfactory to it. RFG has yet to determine the structure and composition of the funding of the cash component of the consideration.
John Livy, the managing director of TMGA will remain with Michel’s. John has extensive experience in multi outlet retail environments including TAB (10 years) and Regional Director of Franchising - Pepsi Co Restaurants Group (11 years). Occupying the position of Managing Director of TMGA since early 2004, John has developed and refined the franchisee service delivery systems for Michel’s as well as recruiting an extremely robust and skilled management team – all of which have agreed to go forward under RFG’s stewardship. In addition Mr. Livy has committed to a long term involvement with the RFG senior management team, both with respect to Michel’s and RFG’s other systems.
Bruce Hancox will join the Board of RFG. Bruce has been a strategic advisor to the TMGA Board since October 2006 and has been instrumental in corporatising TMGA and developing its non-operational service systems. Bruce has over 35 years experience in corporate positions, manufacturing and retailing including 19 years with Brierley Investments (occupying the positions of director and chairman).
RFG Chairman John Cowley said “the Board is extremely excited about the proposed TMGA acquisition as it represents a fantastic opportunity for the Company to consolidate another impressive, and complementary, retail food system under its management umbrella”.
“Not only does the Michel’s Patisserie acquisition allow RFG to apply its proven expertise in managing franchise systems to another high-profile Australian brand”, he said, “it also further delivers on the strategic growth initiatives outlined in the Company’s May 2006 Prospectus”.
TMGA Managing Director John Livy said “the opportunity to partner a successful and growing public company with strong management skills and ready access to capital such as RFG will provide early access for our franchisees and stakeholders to the benefits of a larger organization”.
RFG CEO Tony Alford said “the TMGA acquisition was part of the Company’s strategy to consolidate a number of retail food franchise systems to achieve economies of scale through multi-brand ownership and leveraging of existing franchise systems.”
“Michel’s will bolster RFG’s outlet numbers to in excess of 1,020 franchised units”, Mr Alford said, “As with the recent Brumby’s acquisition, the Michel’s system will fit both strategically and synergistically with our Donut King and bb’s café systems”.
"Michel’s is a well developed and successful franchise system particularly in NSW with 195 outlets. Franchisee revenue is underpinned by its coffee and cake product offering and is of such scale and maturity that, similar to the Brumby’s system, it provides an immediate positive earnings contribution to RFG as well as providing a further platform to drive medium and long term shareholder value”, he said.
Mr Alford said “the TMGA purchase would not only benefit the franchisees of Michel’s, but also RFG’s existing Brumby’s Bakeries, Donut King and bb’s cafe franchisees byallowing further cross-pollination of products, collaborative marketing initiatives, cobranding, supply economies and leveraging of RFG’s proven franchise management systems and growing national presence to take advantage of the significantly increased scale.”
He said “Michel’s, as with Retail Food Group’s existing systems, would retain its unique and distinct branding and identity.”
Mr Alford said, “Retail Food Group would continue the development and growth of the Michel’s network across Australia and New Zealand. Indeed, Michel’s prominent brand, innovative distribution model and service systems positions the brand well for future organic growth”.
Retail Food Group is a leading Australian retail food brand manager and franchisor. It is the franchisor and intellectual property owner of the Donut King, bb’s café and Brumby’s systems.