Just 32 days after it announced the major acquisition of the Gloria Jeans' coffee franchise, Retail Food Group Limited (ASX: RFG) today informed shareholders it had successfully acquired another coffee business, Di Bella Coffee Group.
So What?
Including the gains from Gloria Jeans, the Di Bella Coffee acquisition adds a staggering 30% to RFG's coffee supply.
The business was acquired at an FY16 EBIT multiple of between 5.2 and 6 depending on earn-out achievements, and will be immediately EPS accretive with an expected $6 million contribution to EBIT in FY16.
Di Bella Coffee is costing RFG a total of $27.4 million in cash plus $2.6 million in shares (substitutable for cash at RFG's discretion), with the potential for up to $17.3 million in milestone and earn-out payments to be made for performance.
Funded from a combination of cash and debt, Retail Food Group's total debt will stand at $210 million which is 'comfortably' within the company's EBITDA Leverage Ratio of 2.5x.
Investors also need to bear in mind that RFG is still aiming to acquire the La Porchetta casual dining franchise (70 outlets), which may result in further expenditure in the near future.
While the Di Bella acquisition is subject to the usual due diligence and material change conditions, the purchase is expected to close on 31 January 2015, a month after Gloria Jeans settles.
Now What?
Perhaps more importantly, the acquisition adds the potential to achieve scale in coffee throughput, with RFG now controlling an estimated 5.9 million kg of coffee per annum or a ballpark 13% of the Australian coffee market.
Time will tell if this is enough to achieve cost, supply or quality advantages over competitors, though the addition of Phillip Di Bella to RFG's coffee division in addition to Gloria Jeans should certainly put the company on a strong footing.
Furthermore the ownership of the new outlets, plus existing coffee franchises must surely be sufficient to consider RFG a company with an economic moat – at least in its coffee businesses.
So many outlets also offers strong potential for vertical integration and if they're comfortable with high debt levels, shareholders could be onto a winner with Retail Food Group Limited.
