Strength Strength

Target is the market leader with strong financial forecasts: Restaurant C is the
leading provider of premium Fusion food in the region, with strong forecast revenue
growth in the mid-to-high single digits and expanding margins. Additionally, its acquisition
by Restaurant Group is set to accelerate growth via cross-selling / revenue synergies, as
well as margin expansion through cost synergies and savings. Collectively, these should
help drive top line performance post-acquisition.

Model Answer Explanation: The target’s market leading position in the premium
segment should allow it to capture a significant portion of the growth that is
predicted to come, per the sector report extract and new Restaurant C
information from Restaurant Group’s CEO. The business is also forecast to grow
strongly and expand its margins with scale.

Additionally, Restaurant Group has identified material opportunities to drive

incremental growth by cross-selling Restaurant Group’s offering to create a
superior product. Additionally, there have been additional cost synergies /
savings identified, which should all collectively contribute to positive financial
performance.

Strength Strength
Credit metrics are acceptable and improving over time post-acquisition:
Financial analysis of the proposed deal shows MergeCo meets both the Net Leverage
Ratio test (<5x) and the Interest Coverage Ratio test (>2x). Additionally, the ratios
improve over time as MergeCo continues to grow post-acquisition and as the company
pays off its debt (which in turn also lowers interest expense).

Model Answer Explanation: The two key credit metrics tested in the Deal
Financial Analysis Excel file shows that the transaction passes both the Net
Leverage Ratio test and Interest Coverage Ratio test. Additionally, the metrics
improve over time as the company pays off its debt (de-levers). Lastly, the
business post-acquisition appears to be in great shape with a strong revenue
growth profile (9.3% 2021, 6.5% 2022) and expanding margins.

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Strength Strength
Market is poised for growth: The quick-service restaurant (QSR) space, and premium
QSR in particular, is a fast-growing sector globally underpinned by long-term drivers
such as a sustained preference change towards high quality ingredients and culinary
experiences over price. This should drive accelerating demand in the future years to
help drive company financial performance.

Model Answer Explanation: The sector report extract identified a number of highly
attractive strengths of, and opportunities for, Restaurant Group as it expands into
Asia via its acquisition of Restaurant C. In particular, as the market leader
regionally, it is best positioned to capture incremental market growth (and
demand).

Strength Strength
Developed market operations: Restaurant C’s five existing countries of operations
within Asia are all classified as highly developed, with Restaurant Group’s home region
of Europe also showing healthy economic indicators. With these developed economies at
the forefront of the push towards premium offerings, this should bode well for the merged
company’s future financial prospects.

Model Answer Explanation: The acquirer, Restaurant Group, has its existing
operations based in Europe. The region report extract shows Europe’s economy
is well positioned to grow over the next year and its highly developed nature
dovetails well with the fact that high income countries are at the forefront of the
trend towards premium QSRs. Furthermore, Restaurant C currently operates in
five countries within Asia, which were also classified as highly developed in the
region report extract provided.

Risk Risk
Achievability of synergies and impact on credit metrics: There is a possibility that
the merged entity does not achieve the revenue and cost synergies identified as part
of Restaurant Group’s due diligence. If this occurs, the credit metrics (Net Leverage
Ratio and Interest Coverage Ratio) will be adversely impacted.

Model Answer Explanation: Given the quantum of the identified revenue and
cost synergies, they play a significant role in MergeCo meeting both credit
metric tests. As such, there is a risk that underperformance in this regard could
affect the credit quality of the proposed loan, and potentially jeopardize future
repayment.

Mitigant(s)
Strong fundamentals and the existence of credit metric buffers: Both businesses are
set to grow on a standalone basis, as well as expand their margins, which are both
healthy financial indicators. Additionally, in the first full year after the acquisition (2021),
both credit metrics are forecast to have a material buffer from the threshold levels.

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Risk Risk
Target CEO churn: Restaurant C’s CEO is unlikely to remain after the acquisition,
which may impact the target’s ability to perform post-acquisition.

Model Answer Explanation: This risk was one of the main qualitative risks
identified from the new Restaurant C information from Restaurant Group’s CEO.
Without an experienced Asian leader as Restaurant Group is entering this new
region, it presents a significant qualitative risk as the leader will be key in driving
Restaurant Group’s Asian strategy going forward.

Mitigant(s)
Shortlisted candidates: Restaurant Group has shortlisted three candidates (one internal,
two external) to fill the Asian CEO post-deal, all of whom are highly experienced
operators.

Risk Risk
Future expansion risk: Expansion into less developed nations by Restaurant C may
come with additional country-specific risks, which are not currently present in their
operations within 5 well-developed Asian countries. This may impact their ability to
perform in these markets post-acquisition.

Model Answer Explanation: This risk was also flagged in the new Restaurant C
information from Restaurant Group’s CEO and alluded to the in the Region report
extract as well. As with any expansion plan, we need to consider the incremental
risk associated with it. In particular, the identified countries of Indonesia and
Taiwan are slightly less developed than Restaurant C’s existing five countries of
operations, and therefore represent a material risk to the expansion and therefore to
future financial performance.

Mitigant(s)
Countries #6 and #7 are low risk: Restaurant Group has engaged top-tier risk
consultants, who found the country risk associated with an expansion into countries #6
(Indonesia) and #7 (Taiwan) is low.

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