Taste Holdings: Cap in hand to shareholders again

If the fast food specialist successfully raises R398 million, it will mean that the company has raised nearly R1 billion in three years.
Taste Holdings launches another rights issue to fund the rollout of global brands Starbucks and Domino's Pizza outlets. Picture: Supplied

As expected, cash-strapped Taste Holdings will look to its long-suffering shareholders to initiate another capital raise to reduce its smothering debt load and fund the rollout of cash-guzzling Starbucks and Domino’s Pizza outlets.

Taste, the holder of local rights to both iconic global brands, announced plans on Thursday to raise R398 million in fresh capital, which is larger than its market capitalisation of R353 million at the time of writing.

The fast food specialist has become a serial capital raiser and if the latest rights issue is supported by shareholders, it means that Taste has raised nearly R1 billion through share-for-cash placements and rights issues in three years.

Taste’s financial position is precarious; it faces a bloated debt load of R255 million that exceeds its cash on hand of R86.1 million in the six months to August 2017 and widening losses of R66 million. An oversubscribed rights issue will see Taste pay off its long-term debt and the remaining proceeds will help roll out a further 12 Starbucks and Domino’s outlets in 2018.

It costs approximately R6 million to open a Starbucks outlet, with the biggest costs being IT systems, establishing supply chain networks, employee costs, and store infrastructure, compared with R1.8 million for Domino’s.

Taste CEO Carlo Gonzaga believes in the strategy of backing global brands, which he expects to be the growth vector. Taste might breakeven in the next 18 months but this hinges on the state of consumer spending.

The rights issue, which is fully underwritten by hedge fund Riskowitz Value Fund that is managed by Riskowitz Capital, has been pitched at 90 cents per share, a 16% premium to the 75 cents that Taste shares finished on Thursday.

Shareholder support

Even if existing Taste shareholders do not support the rights issue, Riskowitz will support it. Jean Pierre Verster, portfolio manager at Fairtree Capital, said shareholder support is inevitable. “The rights issue will happen because if shareholders don’t vote in support of it they would be cutting their own throats. The question is how many shareholders would participate at 90 cents per share at a current price of 70-odd cents,” said Verster.

Taste said more than 30% of its current shares in issue (459 million shares) would be issued as new shares. This requires 75% shareholder approval as the company might double the number of shares in issue.

The latest rights issue is Taste’s last resort to free up cash after it failed to sell its luxury jewellery business, comprising Arthur Kaplan, World’s Finest Watches, and NWJ, in which the proceeds would fund the Starbucks and Domino’s expansion.

Read: Taste said to delay luxury unit sale as buyers balk at price

The big question is whether the latest rights issue would give Taste the firepower it needs to turn its fortunes around. Verster said with the support of anchor shareholders like the Riskowitz Value Fund, which probably believes in Taste’s long-term business strategy, the company has a shot of survival.

“It’s a case of the more the anchor shareholder puts in, the more the anchor shareholder has a vested interest in ensuring that the business is successful,” he said. “Taste might be in a much healthier financial position with the support of Riskowitz.”

Riskowitz, which is headed by Sean Riskowitz, who is the CEO of small JSE-listed financial services firm Conduit Capital, is a long-term shareholder in nature.

“Sean is taking a long-term view of Taste being successful even though it needs more capital than what was initially anticipated. Taste will be successful and there is no reason to think that things are coming to an end for it,” said Verster.

Hours after Taste announced its rights issue, Conduit Capital said it plans to raise R350 million through a rights issue that would be also be underwritten by the Riskowitz Value Fund.

Wayne McCurrie, the senior portfolio manager at Ashburton Investments, is cautious about Taste. “I’m generally wary of any company that makes massive acquisition and cash flow decisions. I’m cautious of companies that go into heavy capital intensive acquisitions that are so big in relation to the starting base or size. I prefer to sit back and wait regarding Taste.”

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Trustco, Taste, Conduit….. Riskowitz sure knows how to choose them. The house is teetering. RVF investors are in for an ugly awakening eventually. Methinks Trustco is the weakest link that will bring it all down.

Taste Holdings is similar to a farming enterprise. It needs a constant inflow of new cash injections to remain operational. The shareholders are basically subsidizing the coffee and burgers for the clients. I hope this rights issue is oversubscribed because I still can’t afford the coffee at Starbucks.

The share is currently trading between 70c and 88c at 1 billion shares. Now, if you make the shares 2 billion, surely your mush half the price, such that the share is only 35c to 44c. Why I would want to pay 90c for this is still beyond me. Our arithmetic was better even under Apartheid, how a how a bunch of Corporate Gray Suits can’t figure this out is beyond me. As it is I will have my investment halved, not to mention that the share returned from lofty levels not too long ago. As for me I will stay on the sides, and buy at the market gauged price, otherwise, there a plentiful of other opportunities to deploy one’s capital at better returns. (Disclaimer – I hold a truck load full of share in Taste since 2010.)

The relative value of the shares are illustrated by the amount of shares you will have to exchange for one cup of Starbucks. Then, according to 1’st year economics, it is clear that the demand for shares is weaker than the demand for coffee. To the shareholders who are willing to support the rights offer, this looks like an arbitrage opportunity, go long the shares and short the coffee. There you go, a risk-free trade!

I would make the departure of Conzago a condition of the capital raising exercise.Too many mom and pop stores in this Group which are probably being neglected and not viable.Dominoes growth was only due to them having to fund many of the franchisees ,which is an absurd financing model.They dont have the capital base to be able to do this.Starbucks USA clearly had the wool pulled over their eyes,and some fresh blood at the top could do wonders to invogorate this ailing group

A classic example of ‘throwing good money after bad’

Everyone and I mean absolutely everyone except Carlo Gonzalo himself questioned the viability of these deals at the time, but he persisted, knowing fully well that if it doesn’t work out or if he ran into any hiccups, shareholders would be there stem the flow of bleeding, probably taking notes on how to run a business from the ANC and our S.O.E’s.
All Taste shareholders should indeed call for Carlo’s head before pumping more cash into this business.

Once again, just because something works in the USA doesn’t mean it will work in SA. There is nothing special about Dominos’ pizza and you can hardly compare it to any wood-fired pizza. It doesn’t offer anything more than Debonairs’ electric oven made pizza. The same with Starbucks coffee. Seriously what is the big deal about Starbucks coffee? You can get a cup of freshly ground coffee at numerous other places at half the price. I am glad South Africans don’t just believe that “because something comes from America it must be better.”

End of comments.




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