The decision by empowerment group Grand Parade Investments (GPI) to increase its shareholding in restaurant and fast-food franchiser Spur Corp might seem like a tough transaction to digest.
GPI, which has rolled out more than 70 Burger King stores and just opened its first Dunkin’ Donuts outlet in Cape Town, has proposed acquiring between 16.4m and 19.5m Spur shares from institutional shareholder Coronation. The really tangy part of the transaction is that GPI, which already holds a 10% stake in Spur, has agreed to pay Coronation R40/share — a whopper of a premium to the ruling share price of about R32.
If GPI secures all 19.5m shares from Coronation, its stake in Spur grows to a commanding 28.82%. That will elevate GPI to the largest single shareholder in Spur —though the company’s annual report shows institutional shareholders Allan Gray (11.4%), Fidelity (10.6%), Investec (8.3%) and State Street Bank (5.1%) as still collectively holding much influence.
The critical question for GPI shareholders, of course, is whether their company is paying too much to secure what is effectively a "kingmaker" stake in Spur.
What the deal does entrench in the mind of the market is that GPI is a serious buyer of Spur stock. One suspects, though, that GPI’s appetite might be limited by its balance sheet having to fund the Burger King and Dunkin’ Donut rollout. In other words, it is doubtful — at this juncture — that GPI would want to push past a stake of 34.9% in Spur and consequently trigger a mandatory offer to minorities.
It is true that GPI could raise significant capital to aggressively pursue a controlling stake in Spur if it were to sell off its remaining Sun International-aligned gaming assets, including its significant minority stake in the cash-spinning GrandWest Casino. But now is certainly not the time to be selling off casino assets.
Perhaps GPI’s motives at Spur might be seen a little more clearly by recalling a past transaction in which a kingmaker stake was used to great effect. Roughly eight years ago GPI — then still a determined participant in the casino sector — started building up a meaningful stake in Real Africa Holdings (RAH), which held empowerment stakes in various Sun International operations.
GPI’s tough-as-teak chairman, Hassen Adams, certainly did not endear himself to the old Sun International executive team by snatching the strategic stake in RAH. In the end Adams ensured GPI was paid a premium to let go of its stake in RAH, which opened the door for Sun International to follow through later with a buyout of minority shareholders.
It seems unlikely at this point that there is any attrition in GPI’s advance on Spur. By all accounts the respective executive teams have worked cordially together since GPI acquired its initial empowerment stake in Spur.
But GPI knows the lie of the land. Spur has an impressive basket of brands that, aside from the eponymous family steakhouse chain, includes the promising RocoMamas, John Dory’s, Hussar Grill, Panarottis and Captain DoRegos. But the company has been conservatively run (at least compared with the more adventurous Famous Brands), and there could well be interest in the ensuing years from larger food-service businesses that believe a more strident corporate strategy could bring out more flavoursome returns.
Under this scenario, a 28.8% shareholding could be extremely valuable.
But GPI most likely would want to see its investment in Spur simmer into a warm working arrangement that has mutual benefits for both parties. A longer-term scenario could entail GPI reversing a more mature (more profitable) Burger King (and later Dunkin’ Donuts) into Spur in exchange for scrip. Burger King, thanks mainly to moderating its initial expansion targets, has shown early promise of succulent margins, especially as many of the inputs have been localised by GPI investing in meat plants and catering companies.
Spur will be grateful not only for the broadening of its brands basket, but also for garnering strong empowerment credentials as it seeks new opportunities in emerging market segments.
Ultimately, the market — in jaundiced mood of late — will probably still find it unpalatable for GPI to pay such a premium for extra flavour at Spur. The R779m deal is, after all, big in GPI’s life, representing more than 40% of the company’s market capitalisation.
However, the Financial Mail reckons GPI’s strategy will pan out in the longer term — and this may well be the first step in a process that could create a quick-service/restaurant conglomerate that might rival Famous Brands. At this point it may even be worth speculating whether parts of Taste Holdings, whose efforts to roll out Starbucks and Domino’s Pizza have received a lukewarm response from the market, may be added to this corporate recipe in the medium term.