Famous Brands (JSE share code: FBR) has acquired the franchise agreements, trademarks and intellectual property of Milky Lane and Juicy Lucy from Java Brands for R30,95 million. The acquisition will be funded through a combination of existing cash reserves and short-term debt, and will be earnings enhancing. The transaction is subject to successful fulfilment of conditions precedent and is effective 01 March 2011.
Famous Brands’ Chief Executive Officer, Kevin Hedderwick, comments, “The acquisition of these iconic South African brands serves to further round off our franchised food service leisure portfolio. The compelling purchase consideration and synergies afforded by the integration of Milky Lane and Juicy Lucy into the Group’s business model make this transaction an exciting, low-risk one, which will deliver returns for shareholders from the outset.” Craig MacKenzie, Java Brands’ Director, says, “This transaction heralds an exciting phase in the life cycle of the much loved Milky Lane and Juicy Lucy brands. The highly developed support infrastructure and the economies of scale introduced to the business by Famous Brands are likely to add significant value to the franchised partners. Both concepts are well positioned to benefit from Famous Brands’ proven formula for enhancing and growing world-class brands.”
Launched some 50 years ago by Famous Brands’ founder George Halamandres, Milky Lane is South Africa’s original soft-serve quick service / casual dining ice cream concept, and one of very few brands in this category to have succeeded where others have failed, including several global players. The business consists of 96 franchised outlets.
Hedderwick says the rationale for the acquisition is comprehensive. “Milky Lane is the soft-serve ice cream category leader, which aligns with the Group’s strategy to grow its portfolio of best in class franchised leisure brands. Furthermore, soft-serve is the fastest growing ice cream category in the world at the moment, and continues to gain traction in South Africa too.”
He notes, “As the emerged market continues to enter the mainstream economy, driving growth in this category, there is an opportunity to extend the Milky Lane footprint in terms of store numbers, through both the existing sit-down as well as take-away trading formats, thereby improving accessibility to prospective franchisees and mass market consumers.”
Hedderwick comments, “Notwithstanding the emerged market opportunities, Milky Lane’s product offering is one of South Africa’s best kept secrets but the brand needs to be reawakened and re-communicated to South African consumers at large. The menu and product innovation that currently exist for Milky Lane are world-class, but consumer awareness thereof is negligible. This in itself represents significant upside for existing store growth.”
He adds, “Another key factor supporting this acquisition is that for a long time we have been exploring dessert solutions for certain of our other brands and hence we will be investigating the opportunity to extend the Milky Lane brand and or parts of the Milky Lane intellectual property into a ‘store within a store’ concept across other parts of our network.”
Hedderwick continues, “A significant driver surrounding this acquisition is our ability to backward integrate the supply of soft-serve ice cream to the existing Milky Lane network via our Baltimore Ice Cream plant which has the spare capacity to take on this business. This additional manufactured volume on its own is a compelling case to acquire the Milky Lane business and significantly reduces the price: earnings hurdle rate.
This brand, which has been in existence for 40 years, currently trades out of 18 franchised restaurants nationally. Hedderwick says, “Juicy Lucy pioneered a niche in the health-centred convenience food category, and whilst the brand has lost its way over time, the potential to restore this offering to its former status is evident, more so given the current shift by consumers to health-conscious eating.”
“Juicy Lucy is a well-loved niche South African brand which affords us the opportunity to fill a gap in our portfolio. We have for some time been evaluating a range of specialist and stand-alone health food-focused type brands and are happy that Juicy Lucy offers the Group entry into this category.”
Hedderwick concludes, “Our acquisitions aim to achieve several strategic objectives: ensuring a synergistic fit with our business model and core competence of food service franchising; the opportunity to be a leading player in the categories in which we compete; and unlocking value for shareholders. I am delighted that this transaction comprehensively meets those criteria.”
MANUFACTURING DIVISION: Revenue increased by 6% to R351 million from R330 million. Operating profit decreased 2% to R35.6 million from R36.4 million, due to the deliberate strategy to support the Group’s franchisees by containing menu price increases. Operating margin declined to 10.1% from 11.0%, primarily a function of absorbing red meat price increases and the impact of launching the smaller Steers’ Get Real burger product, introduced to meet demand from price-sensitive consumers for a value offering. Hedderwick comments, “A further backward integration opportunity will be capitalised on with the commissioning of a R14.8 million chicken fillet manufacturing facility. This plant will enable us to service our own brands, thereby gaining business which was previously outsourced. In addition, the Western Cape soft serve business has been brought back in-house and the Group is also set to manufacture and distribute the Milky Lane soft serve product from October, in good time for the Group’s peak holiday trading season.”
LOGISTICS DIVISION: Revenue increased strongly to R702 million from R595 million, an improvement of 18%, while operating profit rose 31% to R21 million from R16 million, reflecting a significant expansion of the logistics basket, facilitated by enhancements in multi-temp fleet capability. The division’s operating margin increased to 3.0% from 2.7%. During the review period the dry basket business of Milky Lane, Juicy Lucy and the Pubs Division was successfully integrated into the supply chain. Hedderwick says, “The Group’s owner-driver pilot project in KwaZulu Natal has proved very successful in terms of productivity, customer service and empowerment. Currently 11 owner-drivers are in the programme and this number will reach 19 by the end of the financial year.”
PROSPECTS: “Our outlook for the forthcoming six months is cautious in the context of prevailing macro-economic factors. The impact of global uncertainty and the weakening local currency will undoubtedly weigh on consumer sentiment. Disposable income will remain restrained in the absence of economic recovery, and intense competition in the industry will persist,” he comments. Notwithstanding its circumspect outlook, the Group is confident that opportunities for growth exist. Management is enthusiastic about potential in the lower-end entry level market in which its participation to date has been restricted; expansion prospects in Africa; and opportunities to further expand its manufacturing capability as part of the Group’s backward integration business model. Hedderwick concludes, “Famous Brands has traditionally experienced stronger second half trading. This will largely be determined by the success of the December holiday period; however we are optimistic that the Group will benefit from its robust marketing and promotion campaigns, high profile brands, and long-standing strategy to ensure widespread restaurant presence at national airports, transient sites on all major motorways, and prime coastal resorts and shopping malls.”
Notes to editors:
The Group’s brand portfolio includes Steers (490], Wimpy including UK (616), Debonairs Pizza (279), FishAways (112), Mugg & Bean (109), tashas (7), House of Coffees (17), Brazilian/Brazilian Café (51), Blacksteer (6), Giramundo (4), KEG (26), McGinty’s (5), Vovo Telo (3) and O’Hagan’s (18). The Group also manufactures and supplies its franchisees and the retail trade with a wide range of meat, sauce, bakery, ice cream, fruit juice and mineral water products.
For further information:
Chief Executive Officer
Famous Brands Ltd
Telephone: 011 651 5812
Mobile: 083 395 8608