The predictions of credit rating agencies should not be treated as gospel, of course. The same crew awarded gold stars to many billions-worth of US sub-prime debt that turned out to be crud. Equally, however, rating agencies survived that fiasco a decade ago because financial markets tend to value the views of outsiders who take a cold look at financial risks and offer a detached opinion. It is why S&P Global’s warning that a no-deal Brexit would cause a long, if “moderate”, recession in the UK should be taken at face value. This is not Project Fear. It is a sober assessment of the odds.
S&P also starts from the reasonable premise that the UK policymakers would do their best to limit the damage. The Bank of England, it expects, would ignore temporarily higher inflation and cut interest rates to zero and possibly start buying corporate bonds to stimulate the economy. S&P also expects the UK and EU to put in place “at least some safeguarding measures”.
Even so, the forecasts make grim reading. GDP would fall 5.5% by 2021 before growth returns at a low rate. Unemployment would rise from 4% to 7.4% in the same period. Inflation, partly caused by a projected 15% fall sterling in the first year, would peak at 4.7%. House prices would fall 10% by 2020. London office prices would slump by a fifth over two to three years. And the UK’s debt-to-GDP ratio would rise from a current level of 85% towards 100%.
This may sound dramatic and the forecasts arrive covered in caveats. But the overall picture clearly isn’t in outlandish or never-seen-before territory. As S&P points out, the projected whack to the economy represents “only” about 60% of the hit suffered during the global financial crisis.
There would be a big difference from 2008 in that the UK would alone in suffering a shock, aside from smaller knock-on effects elsewhere, mostly in the EU. But S&P has a message for any Brexit enthusiast who imagines a drop in sterling offers an easy escape route: it ain’t going to happen. The reasoning is straightforward. Sterling has already fallen 18% since the referendum and the share of GDP growth from net exports has hardly improved even in the absence of tariffs and supply-chain hassles.
Put another way, the UK is horribly ill-prepared for a no-deal Brexit. That’s hardly news but it does put Monday’s budget into context. In a no-deal outcome, you can ignore almost everything chancellor Philip Hammond said.
Wagamama puts a heavy price on noodles
The silliest detail within the Restaurant Group’s announcement of its £559m purchase of Wagamama wasn’t the claim that the incoming business appeals to customers across different “day parts”. That’s just hideous management-speak for breakfast, lunch and dinner. The worse offence, championed in the opening paragraph, was the buyer’s boast that it is paying a multiple of only 8.7 times Wagamama’s top-line earnings in the past year.
If 8.7 was a clean figure, Restaurant Group might be getting a bargain. But it’s not. Wagamama made earnings before interest, tax and depreciation last year of £43m, so an enterprise value of £559m equates to exactly 13 times, which looks expensive by normal yardsticks for valuing mass-market restaurant chains.
Restaurant Group gets to its 8.7 figure by including “cost and site conversion synergies” – in other words, stuff that hasn’t yet happened and will not arrive for free. It’s a bizarre way to present the figures. The elaborate dance won’t fool any investor, so in that sense it is harmless, but why bother? Management looks defensive from the off.
More to the point, the soft-shoe shuffle merely highlights how far Restaurant Group, owner of the Frankie & Benny’s, Garfunkel’s and Chiquito chains, is having to strain to get this deal done. The group has a stock market value of £494m after Tuesday’s 17% fall in its share price, so it is essentially betting its future on Wagamama. In the process, it will raise £315m via a rights issue, take on new debt and inflict a hefty dividend cut on its shareholders.
Maybe it will work out happily. Certainly, Wagamama’s recent sales growth has been vastly superior to that produced by the most of the brands within Restaurant Group. Pan-Asian food may be a long-term market worth pursuing. Yet Wagamama has been through private equity’s lean-and-mean model for the past seven years and the seller, Duke Street, says the £559m price-tag means it will have made 3.4 times its money. That doesn’t obviously leave much on the table for the next owner.