Euro tumbles on Russian gas threat, FTSE dips, Anglo Pacific strikes deal with South32, Restaurant Group gets Barburrito, and Petropavlovsk files for administration

“The FTSE 100 dipped at the open after weak trading in the US and Asia as investors continue to weigh the risks associated with war in Ukraine, stubborn inflationary pressures and Chinese lockdowns,” says AJ Bell Financial Analyst Danni Hewson.

“This cocktail of worries is preventing the markets from making any tangible progress. Dire retail sales data for June raises the spectre of recession in the UK as cost of living pressures continue to bear down on household finances.

“Russia’s renewed threat to turn off the gas to Europe has sent the euro tumbling to a 20-year low against the dollar, near parity with its US counterpart, and will only increase the importance of European producers.

“Kistos Energy is looking to consolidate its position in European gas through a merger with its larger rival Serica.

“For now Kistos has been rebuffed, with a counter offer from Serica dismissed by Kistos itself, but the strategic merits of the deal may begin to add up for shareholders now the negotiations have been made public.

“It’s certainly the case that the scale of the combined entity would make it a very serious player in this market.

“Kistos, which has assets in the Netherlands and the UK, continues to persist. Although it may need to improve the terms of the deal to get it over the line since the premium on offer to Serica shareholders doesn’t look massively enticing.

“Another deal in the natural resources space will see Anglo Pacific acquire royalties over advanced copper and nickel developments from South32.

“The deal looks a good fit for Anglo Pacific’s model of providing cash to natural resource companies in exchange for a royalty on future production.

“Elsewhere in the mining sector the game looks to be up for Petropavlovsk, which is set for an ignominious end brought about by the Ukrainian conflict.

“The Russian gold miner has been under acute financial pressure linked to sanctions, unable to sell its gold or pay its debts, and a company which once had a place in the FTSE 100 looks set to leave shareholders with nothing.

“This is a reminder of the risks of investing in resources firms with assets in questionable jurisdictions, particularly if they only operate in one territory.”

Restaurant Group

“Restaurant Group’s acquisition of Barburrito is significant on multiple levels. First, it coincides with the group making early repayments on £44 million of debt, which shows further progress in trying to strengthen its finances.

“Its 2018 purchase of Wagamama dramatically increased group debt and came at a time when the restaurant sector was reaching saturation point as so many operators had expanded too fast. In the subsequent years Restaurant Group slimmed down its estate and tried to get its finances back in order. Covid somewhat derailed this plan, but it is now bouncing back fast.

“The fact it feels able to make another acquisition would suggest the business has reached a big turning point. The purchase of Barburrito certainly looks cheap, on just 4.4 times earnings before interest, tax, depreciation and amortisation.

“What’s the catch? You must question why the sellers are happy to offload this business on such a low multiple of earnings. Barburrito went into administration in 2020 and was saved by its chairman and management team. While it made a profit in the year to September 2021, that was helped by temporary government support measures such as lower VAT.

“With the prospect of recession upon us and these Covid support measures having been withdrawn, perhaps the owners thought it was time to get out while the going was good?

“And therein lies a problem. If recession hits the UK, how will Barburrito cope with consumers already under significant financial pressure? A lot of its restaurants are situated in shopping centres which could become a lot quieter if people are watching their spending. If someone only has limited money to spend on food, would they pay £10 for a burrito, or buy something cheaper?

“It appears that Restaurant Group got such a good deal because of these near-term risks to earnings.

“Restaurant Group wants to expand the chain, particularly in the south, but it won’t be that simple. Many major cities in the UK already offer burrito outlets, so there is plenty of competition. Therefore, Restaurant Group planting flags in new territories for Barburrito won’t necessarily lead to guaranteed success.”

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