Retail Food Group Limited (ASX: RFG) shares have been placed into a trading halt today following the release of announcement. Here’s what you need to know.
About Retail Food Group
Retail Food Group is a master franchisor of various fast food chains including Gloria Jean’s, Brumby’s, Donut King, Michel’s Patisserie and Crust. It is also a major roaster and supplier of coffee products.
The one time popular ASX share tip has had a spectacular fall from grace, with its share price plummeting more than 90% from its highs just two short years ago. Weighed down by poor governance and a mountain of debt, the company has been exploring its options in order to stay afloat.
What’s Today’s Announcement?
Retail Food Group has announced a capital raising to repay debt, strengthen the company’s balance sheet and provide working capital. It is seeking to raise a total of $160 million: $150 million through an institutional placement and $10 million via a share purchase plan for existing shareholders.
The business has a market capitalisation of around $30 million, so the capital raising is more than 5 times its current market value. Retail Food was in a net debt position of $260 million as at 30 June 2019, so the capital raising will not be enough to pay down all its debt. The company expects net debt to be $64 million post the capital raising.
In a complex deal, as part of the capital raising, Retail Food’s debt providers have agreed to a partial debt write-off, partial pay-down and extension of the remaining balance which is conditional on the equity raising being completed.
Earnings Guidance
In the announcement and associated presentation, Retail Food Group has also provided FY20 earnings guidance. It expects EBITDA to be in the range of $42 to $46 million, assuming full-year contributions from all continuing business units, but excluding the impact of AASB15 and AASB16.
It also announced a number of initiatives to ‘right size’ RFG, including further cost reductions and initiatives to increase franchisee profitability. For a franchisor to be successful, the franchisees need to make a reasonable and sustainable profit.
Is RFG A Buy?
Turnaround stories like this generally aren’t my thing, although I must admit I did recently make a small purchase of iSentia Group Ltd (ASX: ISD) shares, a business whose share price has suffered like RFG’s over the past couple of years.
The capital raising gives RFG a more stable footing, keeps the banks that have lent them money at bay and gives management an ability to focus on the business.
While there’s less chance the company will collapse under the weight of its debt, it’s still too early for me to invest. Personally, I prefer higher quality businesses, but RFG may be one to keep on your watchlist.
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At the time of publishing, David has no financial interest in RFG, but does own shares in iSentia.
