Offshore deals come back to bite Famous Brands, Woolies
These poisoned chalices show that major shareholders need to scrutinise target companies more closely
The initial euphoria that greeted Famous Brands’ Gourmet Burger Kitchen (GBK) deal shows that shareholders also underestimated how tough things were about to get. While management must accept most of the blame, a healthy dose of introspection is needed on the part of the investment community, too.
Within weeks of the announcement in early September 2016, the group’s shares had soared to record highs of nearly R170. But soon after, the cracks began to appear, and Famous Brands’ biggest deal yet came back to haunt it. The stock is now hovering at around the R100 level – or back to where it was four years ago.
The UK burger chain took an R874m write-down when Famous Brands released its interim results on Monday, knocking Famous Brands into a R544m loss from a R192m net profit in the previous six months.
Woolworths’ investors were also blind to the dangers of huge offshore deals. In 2014, shareholders approved the retailer’s $2bn acquisition of David Jones. Years later, the group is also reeling from the ill-judged takeover.
These deals, both poisoned chalices, show that major shareholders need to scrutinise target companies more closely.
Kevin Hedderwick, Famous Brands’ group strategic adviser responsible for mergers and acquisitions at the time of the GBK deal, was, in a way, on the money when he said the acquisition “will be as much of a game changer for the group as our acquisition of Wimpy SA was in 2003”.
But he was not right when he said the group was confident GBK had the potential to double its restaurant footprint within five years. In fact, the group may cut another 17 stores as part of its current insolvency process.