Inghams and Reece

This post does sort of relate to REH and hopefully I can draw the link at the end……..

Tonight when I went to cook my Inghams chicken tender I discovered that they had changed into that mushy chicken nugget centre instead of crumbed chicken breast fillet as they were a few weeks ago. This got me thinking, wasn’t Inghams to be floated? Upon further investigation I discovered that Inghams which had been a family run business for almost 100 years and was sold to TPG in 2013 for 880M. After selling most of their hard assets for 650M and loading the balance sheet with debt (620M - depending on which report) TPG should come away with a tidy profit. It is slated to list in September/October this year for 1.3B plus according to The Australian.

These are my calculations for TPG’s profit assuming a 1.5B listing price and assuming TPG is able to sell down their remaining shares near the list price:
Profit = list price + asset sales – (equity to purchase)
Profit = 1500M + 650M – (880M-620M)
Profit = 1890M
Not bad for an initial investment of 260M, which gives a return of over 7000% in 3 years for their efforts.

How does this relate to Reece? Reece is also a well-run family business. Reece also owns many of its own property assets and are of similar value. Reece also is a leader in its field. In fact upon further reflection Reece was in many ways similar to the old Inghams and both were top quality businesses. (*) The reason why I am writing this is because I was saddened by what I think has happened to a great Australian business.

Assuming a listing price of 1500M, 620M in debt and EBITDA of 225M (The Australian) the EV/EBITDA of Inghams post float will be 10 and not much below that of Reece. My question is simple – Why would you buy the Inghams float when you could buy a business like REH? After my experience tonight I feel that 225M will be over earning as they have lowered quality and customers will catch on and stop purchasing their product.

My guilty conscience demands that I put the more pertinent reason I posted on the REH ticker………..
There are a number of posters here that I feel speak sense around valuation, even to a relatively inexperienced investor such as myself - Warrigals, MarsC, Travelightor and in particular thanks to Madamswer.

I would love to get your thoughts on this. I know it is not as dangerous to capital preservation as a mesoblast. Having said that it still feels dangerous, maybe more like a Dick Smith with a slightly stronger brand? TPG did a similar thing with Myer when it listed at over $4.

(*) I realise most posters know far more about REH than I do and that they operate in very different industries. REH distributes to the individual, Inghams through an intermediary such as a supermarket. Hence in my opinion REH is better quality as customer concentration is in effect lower.