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Domino’s (ASX:DMP) shares lift on acquisition

Domino’s Pizza Enterprises Limited (ASX: DMP) has entered into a binding agreement to acquire PizzaVest Company Limited (Domino’s Taiwan).

The market has responded positively to the news, with the share price up 1.56% to $115.83.

Domino’s enters 10th market

Domino’s Taiwan is the tenth master franchise addition for DPE. The company already holds licenses to the Domino’s brand and network in Australia, New Zealand, Belgium, France, The Netherlands, Japan, Germany, Luxembourg and Denmark.

Domino’s Taiwan is currently the 2nd largest pizza chain behind Pizza Hut, operating 138 franchised and 19 corporate stores. Management believes over the long-term it will be able to expand the store count to over 400.

Group CEO & Managing Director Don Meij said:

“We intend to expand the store footprint through opening more corporate stores, introducing new, internal, franchisees to the network, helping existing franchisees profitably expand their businesses, and investing in the network and our people to drive long term growth.”

The numbers

Domino’s will pay a purchase price of $79 million upon completion of the acquisition. The purchase will be funded through a combination of cash and debt and is expected to be completed in the second half of 2021.

In FY20, Domino’s Taiwan delivered network sales of $73 million and earnings before interest, tax, depreciation and amortisation (EBITDA explained) of approximately $4.8 million.

Based on FY20 financial results, Domino’s Japan will add 2% to DPE’s earnings excluding integration and transaction costs. This is expected to grow over time following the addition of DPE’s IT capabilities, operating expertise and leveraging regional synergies, particularly in Japan.

Non-recurring expenses and capital expenditure of $10 million to $11 million is expected over the first three years.

The acquisition will increase the DPE store count by 5.9% to 2,825. Domino’s Taiwan will be led by Josh Kilimnik – who is leading the turnaround of Domino’s Japan. In future financial results ‘Japan’ will be renamed ‘Asia’ to aggregate the operations of Taiwan, China and Japan.

My take

Taiwan has a population of 23.5 million people, similar to that of Australia (25.6 million). The Australian & New Zealand (ANZ) segment within DPE has a population per store of approximately 35,000. Using those figures, Taiwan could achieve 671 stores therefore the long-term aspiration of 400 stores is well within reach.

The ANZ segment achieved an average revenue of $1.47 million per store in FY20, compared to $0.46 million for Taiwan. If the DPE management team can implement its success in Domino’s Taiwan through increasing weekly sales and expanding store count, this will be a great acquisition.

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At the time of publishing, Lachlan does not have a financial or commercial interest in any of the companies or funds mentioned.

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