Famous Brands, Africa's leading quick-service and dining franchisor, should accept defeat and let go of its UK business, Gourmet Burger Kitchen (GBK), says an analyst - if it can find a buyer, that is.
The company, which owns the Steers, Debonairs Pizza and Wimpy fast-food brands, is reeling from the overambitious acquisition.
Famous Brands bought GBK in 2016 for £120m (R2.2bn), which is now regarded as far too steep a price. The group's share price has fallen 34.7% since it bought GBK.
This week the company warned shareholders in a trading update that for the year ended February 28 2019, headline earnings would decline between 16% and 33%.
The group expects operating profit in SA to remain the same, while losses in its UK burger business would grow to £4.6m, compared with £3.7m from the prior reporting year.
GBK's woes in the UK market are exacerbated by widespread economic and political uncertainty stemming from Brexit as well as subdued consumer confidence and muted discretionary spending.
Lulama Qongqo, a consumer analyst at Mergence Investment Managers, said: "I think it's best perhaps that they accept defeat and just walk away without spending another cent on that company."
Exiting or shutting down GBK, even though at a loss, would mean management's time was freed up, which would enable them to focus their energies on SA and other regions they operate in, she said.
The company has more than 2,700 outlets in 22 countries.
"The whole portfolio of Famous Brands is actually a really good one when you exclude GBK," said Qongqo.
How long will Famous Brands feel the negative impact of GBK? "It depends on how long management insists on keeping the business and throwing money at it," said Qongqo.
"But when it comes to the trading environment, there's no way of telling how long we will see GBK bleed because the UK is yet to finalise Brexit."
The company also owns the Mugg & Bean, Tashas and Mythos restaurant brands.
Qongqo said that selling some of the smaller brands in the franchisor's portfolio as part of cost-cutting wasn't a good idea. "I don't think that they should be selling any of the smaller brands to free up cash to keep GBK afloat. I think that would be throwing good money after bad."
The acquisition of GBK has cost Famous Brands R873.9m in impairments and a one-off cost of R17.2m for professional fees related to store closures.
Damon Buss, an equity analyst at Electus Fund Managers, said finding a buyer for the loss-making restaurant chain would be a struggle for Famous Brands.
"A key issue is that in order to acquire GBK, Famous Brands leveraged up their South African balance sheet and it is unlikely any offer to buy GBK would be high enough to cover this debt, leaving Famous Brands to continue funding the debt repayments from its cash-generative South African businesses," Buss said.
He said what could alleviate the pressure on the food group is the CVA (company voluntary arrangement) it applied for that has seen the closure of 29 of its stores and a 20% to 40% rental reduction in 29 other stores.
Buss expects that GBK will return to profitability in the 2021 financial year.
Keith McLachlan, an analyst at AlphaWealth Asset Management, said the company was trying to fix its UK business as it seemed exiting it was not viable and shutting down was the last resort.
The group expects to report its full-year financial results on May 29.
thukwanan@sundaytimes.co.za..