Is Retail Food Group Limited the next Domino’s Pizza?

Credit: zehhhra

Some of the fastest-growing companies in Australia over the past few years have been serial acquirers. For example Domino’s Pizza Enterprises Ltd. (ASX:DMP) is up 965% over the past few years, partly due to acquisitions, while Greencross Limited (ASX: GXL) and G8 Education Ltd (ASX: GEM) are also both up more than 500% in that time.

Retail Food Group Limited (ASX: RFG) (“RFG”) is a lesser-known business that buys growth and its brands will be familiar to most Australians. RFG has risen a more modest (‘modest’) 234% over the past five years, and it shows no sign of stopping after its latest acquisition.

The latest purchase

Today RFG announced that it has satisfied due diligence requirements and completed its latest acquisition, Hudson Pacific Corporation, with whom it has been working for the last 20 years. Hudson’s acquisition was first announced on 25 August, and cost RFG approximately $88 million, of which $55 million was cash and $33 million in the form of RFG shares. The Hudson acquisition alone is expected to deliver a 10% increase in RFG’s profit this year.

RFG’s Managing Director, Andre Nell, reported that the Hudson acquisition was unique compared to previous acquisitions as it met all of RFG’s core investment criteria. These include vertical integration, significant scale, and providing meaningful benefit to existing franchisees.

Meanwhile, RFG can leverage Hudson’s capabilities to offer additional services to wholesale customers and franchisee businesses. Importantly, Hudson’s founder/Managing Director Ken Skoullos, and CEO Frank Karkalas have agreed to join RFG on a full-time basis, taking up managerial roles in the company. This will add valuable expertise as RFG expands its operations over the next few years.

Vertical integration has long been a priority for RFG, and the company now controls most of its own supply chain, from food and coffee manufacturers to franchisee shopfronts. While this brings additional supply opportunities, protects against competition, and makes the company’s franchises more attractive, it has also been a heavy investment in lower-margin, capital-intensive businesses.

These will need to be carefully managed to control costs, but the opportunities are attractive and I remain a satisfied holder of my Retail Food shares.

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Motley Fool contributor Sean O'Neill owns shares of G8 Education Limited, Greencross Limited, and Retail Food Group Limited. The Motley Fool Australia owns shares of Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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