Montreal-based restaurant conglomerate MTY Food Group Inc. (TSX:MTY) announced on December 12 that it is buying Imvescor Restaurant Group Inc. (TSX:IRG), the parent company of Pizza Delight and Baton Rouge restaurants, for $4.10 a share, a 13% premium.
The terms of the deal call for MTY to pay $248 million for Imvescor with 20% in cash and the rest in MTY stock. If you own Imvescor stock, here’s why you should let it ride.
Pizza’s a big category
Back in March of this year, I recommended three ways to get in on the pizza market here in Canada. One of the options was through IRG stock, which I felt had a nice dividend yield, operated some good restaurant brands, and was making money.
Based on the $4.10 per share offer by MTY, IRG stock is up 29% since my March recommendation; it’s a good return, to be sure.
However, before you sell, consider why rolling your IRG stock into MTY makes sense and what this could mean for future gains.
Let’s face it, even though the two companies are positioning this deal as the combination of two equal restaurant franchisors into a leading North American player in the fast casual and quick service restaurant business, the reality is that MTY towers over Imvescor, and its CEO, Frank Hennessey, knows it.
“This is the natural next step for our company,” stated Hennessey in the press release announcing the deal. “In an increasingly competitive operating environment, we will be better positioned to invest in our brands and our people as part of a combined company with expanded resources and reach. The transaction offers shareholders, franchisees, employees and other stakeholders of both companies a significant opportunity for value creation.”
Normally these statements reek of corporate gobbledygook, but in this situation it’s true.
If you take a look at the lineup of 70 brands that serial acquirer Stanley Ma’s built or acquired at MTY, you’ll see that it has almost no participation in the pizza business or casual dining. Approximately 90% of its revenue is generated by quick-service restaurants such as Manchu Wok, Mr. Sub, Extreme Pita and Mucho Burrito, and Country Style.
Adding Imvescor’s brands ups its casual dining business on a pro forma basis to 22% of systemwide sales from 10% before the tentative acquisition. That’s huge considering the resources MTY can put toward growing Pizza Delight and Baton Rouge across the country.
In Ontario, where I live, the top five pizza brands generate close to $1 billion in revenue, and I’m sure MTY is eager to get a slice of that market.
MTY is valuing Imvescor at 13 times EBITDA and less than 11 based on synergies between the two businesses. MTY’s current enterprise value is nearly 13 times EBITDA, which means investors are valuing the bigger business at about the same multiple as MTY’s valuing the smaller one.
That’s a clear sign that both parties see the benefits of this marriage. MTY investors should not fret the dilution; you’ll be paid back handsomely through the expansion of Imvescor’s brands in Eastern Canada.
Bottom line on MTY/Imvescor tie-up
MTY’s made more than 55 acquisitions over the past 15 years, which has led to significant value creation for its shareholders.
As I mentioned, the benefits of this combination seem solid. Take the MTY shares and hold them for the next 10 to 15 years. By then, Pizza Delight should be coast to coast.