Shares in off licence operator Conviviality Retail (LSE: CVR) rocketed more than 20% higher this morning, after the group announced a major deal with Punch Taverns (LSE: PUB).
Conviviality, whose main brand is the 600-strong Bargain Booze off licence chain, plans to triple its annual sales. The firm has confirmed previous reports and announced plans to acquire drinks wholesaler Matthew Clark, which is a 50/50 joint venture between Punch Taverns and Hertford Cellars Limited.
Conviviality will pay 200m for Matthew Clark, which will be funded with a 130m placing of new shares and a new borrowing facility of 80m.The deal should transform Conviviality into a major UK drinks wholesaler and the group expects to have combined annual sales of more than 1.1bn, nearly triple last years turnover of 364.1m.
Punch will also benefit, as it will receive around 100m for its stake in Matthew Clark. This will help to reduce its hefty 1.5bn debt burden.
Is the price right?
Based on figures provided by Punch, Matthew Clarks post-tax profits for the last twelve months were 15.6m. This makes the 200m price tag equivalent to a P/E ratio of 12.8, which seems reasonable.
Does this deal make Conviviality or Punch a more attractive buy?
Punch
Punch shares currently trade on a 2015 forecast P/E of just 3.4. The reason they are so cheap, of course, is that the firm had far too much debt and nearly went bust in the aftermath of the financial crisis.
Things are improving. Net debt has fallen from 3.6bn in 2009 to 1.5bn, and further improvements are expected as Punch continues to sell non-core pubs and focus its estate on more profitable locations.
Punch is very much a turnaround investment at the moment, but todays deal is good news and I can see the investment potential here. According to Punchs latest trading update, the net value of its pub estate, less debt, is 691m. Thats more than twice the firms market cap of 291m.
Punch could be a value buy.
Conviviality Retail
Conviviality floated on AIM in 2013, since when its shares have risen by 48%, including todays gains.Net profit has also risen strongly, from 4.8m in 2013, to 11.2m in 2015. Before todays gains, Conviviality shares offered a generous dividend yield of about 5.3%, and traded on a forecast P/E of about 13.
Todays deal looks set to change the picture completely. The 200m acquisition is larger than Convivialitys 125m market cap and will require the firm to issue 130m of new shares and borrow 80m.Sales are expected to rise to more than 1.1bn and the firms larger scale may mean it can secure more competitive pricing on its stock, which could be good for margins.
However, the placing shares were sold at 150p, significantly below the current share price, and we dont yet know how quickly the firm will be able to start reducing its net debt.In my view, it makes sense to let the dust settle before deciding whether to invest here. There will probably be better buying opportunities, once the excitement surround todays deal has died down.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.