GBK-THE SOUTH AFRICAN INVESTOR

THE SOUTH AFRICAN INVESTOR

GBK

The most expensive burger in the world

By Japhta Mamalema
16 April 2020
 

This is a story of how Famous Brands overpaid on acquiring GBK and wasted R1.82 billion (£120 million)
gbk-secondary-promo-lamburghini-uk

The announcement by Famous Brands (FBR) to cut-off financial support to its UK subsidiary: Gourmet Burger Kitchen (GBK) and writing-off the investment is an admission of failure and the loss of R1.82 billion.

GBK now has to stand on its own two amidst a debt-pile, store closures and a global recession.
 

The following is a retrospective look and author’s opinion of the GBK acquisition by FBR.
 

The GBK acquisition was effective on 7 October 2016 at a price of R1.82 billion (£120 million).

The purchase price was based on

  • A recent EBITDA of £9.6 million and
  • GBK being a leader in the premium UK burger market among other factors.
 

In the 5 years leading up to the acquisition GBK performed as follows:

Table: GBK Revenue, EBITDA & Net profits
gbk_2016

Source: GBK annual financial statements (2016-2010)
 

After the acquisition, GBK performed as follows:
gbk_2019

Source: GBK annual financial statements (2019-2017)
 

In September 2018

GBK entered into company voluntary arrangement (CVA) negotiations with creditors as it was struggling to meet its debts.

It had to close 14 burger joints afterwards.


 

In my opinion: GBK’s value was nowhere near the excessive £120 million.

The use of EBITDA to value GBK was a complete disregard for fixed costs and income taxes.
 

For any restaurant chain like GBK,

Building space and equipment are necessary things to have in order to operate.

EBITDA ignores the cost of the use of such vital assets and income taxes.


Despite being a leader in the UK Premium burger segment,
GBK's numbers were not impressive.
The investment was very optimistic on the part of the FBR board.

From the table below, which is a reproduction of the tables in the previous page,

Using the 2016 EBITDA of £10 million,

FBR expected to recover its £120 million investment in under 12 years.
 

This was flawed as shareholders of any business only benefits from profits after tax.

At the time of purchase (2016) GBK’s net profits had never exceeded £2 million.
 

In shelling out £120 million,

FBR was in effect willing to wait 60 years to make back its investment;

Equivalent to investing money at 2% per annum.
 

Table: GBK Revenue, EBITDA & Net profits
gbk_all
 

Source: GBK annual financial statements (2019-2010)
 

The GBK purchase was financed by R2 billion worth of debt which FBR still has.
 

The worst is not out yet.

While R1.82 billion of shareholders money got squandered,

R21.3 million was paid out in cash bonuses and stock to executives over the past 3 years.

FBR remains liable for the R2 billion debt used to purchase GBK for which it has dim prospects of recovering.


Extract of Remuneration policy:

“The scorecard comprises three technical goals plus one development goal. The technical goals include Operational profit, HEPS growth at CPI plus 50% of CPI, EBITDA growth at CPI plus 50% of CPI, market share and customer service components.”

Source: 2017 integrated report

Table: Executives cash bonuses and stock awarded
gbk_exec
 

Source: 2019-2017 integrated reports

“The lesson here is that a business does not earn more money because of the higher price paid for it.”
 

Resources
PDF file of article

FBR AFS- https://famousbrands.co.za/investor-relations/financial-results/

GBK AFS link -https://beta.companieshouse.gov.uk/company/03970045/filing-history

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