The Company
Alsea (ALSEA) is a leading restaurant operator in Mexico and Latin America. It has a multi-brand portfolio including the operation of Domino’s Pizza, Starbucks, Burger King, Chili’s, California Pizza Kitchen, P.F. Chang’s, Pei Wei, Italianni’s and The Cheesecake Factory. Alsea’s business model includes backing for all of its business units through a shared services and support centre that provides assistance to all of the administrative and development processes, as well as the supply chain.
The total value of the consumer food service industry in Mexico stands at around $60bn, according to Euromonitor, a London-based market research group. Euromonitor estimates that the food industry could grow at a compound annual growth rate of 5.7% over the 2012-16 period. The industry is segmented in the following way: 52% in full service, 22% in street stalls, 12% in fast food (QRS), 9% in coffee shops, 4% in casual dining and 1% in pizzas.
Alsea has 129 outlets that operate in casual dining, 519 coffee shops, as well as 1163 pizza and hamburger restaurants. Mexico is the main market and has been the base for the group’s regional expansion. Based on Alsea’s results, Mexico constitutes almost 65% of total sales and around 80% of earnings before interest, taxes, depreciation and amortisation (EBITDA). The company has 1536 stores in Mexico, with Argentina the second-most important market at 138 stores, followed by Chile and Colombia, with 85 and 52 stores, respectively.
Vips, Starbucks and The Cheesecake Factory constitute Alsea’s main growth drivers. In September 2013, the group reached an agreement with Walmart Mexico to acquire Vips restaurants in a transaction valued at $617m. Vips is one of the most iconic and well-regarded consumer brands in Mexico, with a nation-wide presence of 362 restaurants. Sales in 2012 generated revenues of $466m, which would represent 40% of incremented revenues for Alsea and $73m in EBITDA. Another benefit for Alsea would be the synergies coming from its procurement activities that might increase its negotiation leverage with suppliers. Meanwhile, Alsea is expanding its presence in Latin America through its Starbucks franchise. Recently the company acquired the minority participation that Starbucks held in Mexico, Chile and Argentina. In addition, Alsea expanded the franchise’s operation in Colombia under an agreement with Nutresa in a 70/30 joint venture. Alsea’s business plan includes opening up five new coffee shops in Colombia in 2014. Another source of revenue is Alsea’s newest franchise, The Cheesecake Factory, in Mexico, which is expected to open in Q1 2014. Alsea estimates that revenue stemming from each of the restaurants could be 3.5 times of those generated by its casual dining restaurants (P.F. Chang, Italianni’s and Chili’s). Finally, Alsea acquired a 25% minority stake in Axo, a company specialising in fashion clothing and luxury items such as Tommy Hilfiger, Coach and Guess, among 14 brands. Axo has around 2200 points of sale and 116 retail stores in Mexico.
Development Strategy
For 2014, Alsea’s strategy will be focused on growth in Mexico and the wider Latin American region. We estimate the opening of 130 units: 60% Starbucks, 17% Burger King, 10% Domino’s and 13% in other brands. As such, for 2014 we predict revenue and EBITDA growth of 44% and 50%, respectively, year-on-year over 2013. Moreover, Vips could be accretive for Alsea’s EBITDA margin in 2014. We estimate a 50 bp increase to 15.5%. However, it is also worth noting that even though we expect synergies with Vips acquisition, Alsea will have to invest to renew Vips’ units, systems and marketing apparatus, so these will be achieved gradually. Alsea is considering a follow-on offer in capital markets. The group needs to reduce its short-term debt, which rose due to the bridge loan used to finance Vips’ acquisition. To reach its net debt-to-EBITDA target (3x), the offer could reach $226m. We have a 2014 year-end target price of MXN48 ($3.73) for Alsea.
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