Domino's Pizza moves to solve its German problems

Discussion in 'Market News' started by Lily, Dec 17, 2015.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
    Likes Received:
    Company sets up joint venture with Australian partner and buys German rival

    Domino’s Pizza Group is hoping to take a bigger slice of the German market by setting up a new joint venture with an Australian partner.

    The group had been attempting to set up a chain in Germany on its own but has now changed tack. It has agreed a joint venture with Domino’s Pizza Enterprise (DPE), split one third-two thirds, and will transfer the master franchise rights for the country in return for a payment of £18.2m.

    We see Domino’s strategic joint-venture with Australian-based Domino’s Pizza Enterprises to buy Joey’s Pizza as an admission that Plan A (build a UK-style operation in Germany from scratch) has failed. But sometimes it is better to move on and Plan JV is worthy of consideration. The acquisition of Joey’s Pizza, Germany’s largest pizza delivery operation, allows Domino’s to catapult itself into No1 slot in a fragmented market with a platform to grow but the decision to do this in partnership rather than alone will puzzle the market.

    Financing is not an issue, rather the UK operation does not have the expertise to deliver, given the track record in Germany, and this is where the DPE has seen its opportunity to grab a slice of the action and form a European bridgehead. The deal spreads the financial and operational risk and DPG has put and call options to protect its position.

    Not only has a major management distraction been removed but the group has given itself a much better chance of creating some value out of Germany. The deal doesn’t make a material difference to fair value in the short term, but we do view it positively and retain our add.

    In our view, this transaction makes strategic sense, creating the leading pizza delivery business in Germany. It can leverage pan-European buying power, utilise DPE’s regional infrastructure expertise, and remove a potential distraction for the UK management team. Our forecast upgrade also reflects the opening of 55 stores in the UK in 2015, ahead of previous guidance (and forecasts) of 50 stores

    Germany’s expected losses of £3.5m in 2015 will become discontinued, resulting in our pretax profit upgrade to £71.5m from £68.0m. Although Joey’s is expected to generate £5.1m of underlying EBITDA in 2015, we forecast no joint venture profits or losses (versus previous forecast of a £3.4m loss) in 2016 due to the cost of integration and converting stores into the Domino’s brand. In 2017, we forecast a £1.5m joint venture profit (versus previous forecast of a £3.3m loss) as the business starts to expand aggressively.

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