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Domino’s Pizza buys 75% stake in Domino’s Pizza Japan

Domino’s Pizza Enterprises (ASX: DMP) has been busy adding to its own menu, acquiring 75% of Domino’s Pizza Japan (DPJ) for approximately AU $128 million plus agreeing to supply new debt funding of another AU $96.4 million for a total of about $225 million.

It is purchasing this majority ownership from Bain Capital Domino Hong Kong, and will add 259 Japanese stores immediately, with projected future expansion to about 600 stores in total. The current experienced management team in Japan will remain, and continue to be led by Scott Oelkers, who has been with Domino’s for 25 years.

Pro-forma revenue for DPJ is reported to be about A$252 million, with approximately A$28 million in pro-forma EBITDA for the 2013 financial year up to 31 March 2013. It is the third-largest pizza delivery chain in Japan.

The announcement stated that the acquisition would be about 9% earnings accretive (before transaction costs) to Domino’s Pizza Enterprises’ earnings per share.

To fund the investment, the company has announced an equity rights issue offer to raise $156 million gross, in addition to another $101 million drawn down from new debt facilities that will be on-lend to DPJ. If the rights issue is successful, then total outstanding shares of the company should rise by 15.92 million shares based on $10.20 per share issue price. This is a 21.79% increase in total shares, so company earnings per share will be diluted accordingly.

At the same time as the acquisition announcement, the company released its 2013 full-year report with a total revenue $294.8 million from its company stores and franchise sales, up 11.3% from $264.88 million. Net profit grew less, only 6.4% to $28.65 million from $29.93 million.

Foolish takeaway

The company’s share price is up 16.9% to $13.45 from before the acquisition announcement and annual report when it was about $11.50.  Currently, the PE ratio is about 34. With its regular annual earnings growth of about 15%-20% plus the expected extra earnings from DPJ from now on, you have to factor in the 21.79% earnings dilution from the rights issue.

You wouldn’t be buying shares at bargain prices, so you have to know the growth story if you want to get a handle on your future return.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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