BMO Nesbitt Burns analyst Peter Sklar thinks the motivation for Fairfax Financial Holdings Ltd.’s
decrease
$1.2-billion proposal to take Recipe Unlimited Corp. private is “apparent.” “Given that the Canadian restaurant space, both quick-service and full-service, is finally turning the corner and gaining momentum after languishing for essentially two years as a result of COVID-19, the pre-bid stock price arguably offers value to Fairfax,” he said in a research note.
“We reference both Restaurant Brands’ and Recipe’s recent Q2/22 quarterly reports which highlighted this recovery with Tim Hortons generating same-restaurant sales (SRS) in Canada of 14.2 per cent and Recipe generating SRS of 61 per cent. We estimate that each of Tim Hortons Canada and Recipe has about 6 per cent/7 per cent of pricing built into the menu board implying that traffic and average check made substantial gains during the quarter. Much of these strong results can be attributed to a depressed comparable period when there were impactful lockdown measures last year due to COVID-19. However, we believe these results also reflect the considerable pent-up demand among Canadians who desire to return to restaurant experiences following about two years of restrictions. While the Canadian consumers’ discretionary income is being squeezed by interest rates and high food and fuel prices, we note that the consumer did accumulate savings during COVID-19 and Recipe’s banners are generally positioned as value in both the quick-service and full-service verticals, which should appeal to consumers in this environment.”
Mr. Sklar thinks a higher price by Fairfax or a superior bid by another party is “unlikely,” noting Fairfax currently owns 61.5 per cent of Recipe’s shares, the offer is being supported Recipe’s board, and “Recipe has always presented an eclectic portfolio of brands that are difficult to assess and would deter interest in the company from other potential parties.”
“Based on the stock’s current level after trading up on the announcement, and our view that the proposed transaction will proceed, we see limited further upside in the stock,” said the analyst, leading him to lower his recommendation for Recipe shares to “market perform” from “outperform” previously.
His target rose to $20.73 to align with the offer from $19. The current average is $21.12.
Elsewhere, CIBC World Markets analyst John Zamparo downgraded Recipe Unlimited to “tender” from “neutral” with a $20.73 target, up from $16.