Conviviality Retail: Acquires Wine Rack, Potential Synergies Abound

Conviviality Retail (CVR:LN) announced this morning it is acquiring the share capital of LCL Enterprises for £1.65m, paid out from the group’s existing cash resources. LCL Enterprises trades as Wine Rack, a specialist retailer of wines, spirits and general tobacco with 22 stores, predominantly located in the Greater London area. The acquisition adds c £5m to our FY14e and £10m to our FY15e revenue forecasts. At this stage we are not adjusting our earnings estimates. We see the acquisition as a positive long-term strategic step, consistent with the stated strategy of expanding CVR’s wine offering and expanding into the south of England from its roots in the north of England.

Wine Rack (www.winerack.co.uk) was acquired by its former owners as an expansion of their wholesale business in November 2009. Having grown the business from 13 to 22 stores, it is understood that the former owners wanted to return the focus to the wholesale part of their business. As part of a larger retailing chain, we see potential synergies from bulk purchasing and benefits of a management team focused on running general retail stores. In the near term the stores will continue to run on a managed basis, with existing staff and head of operations being retained. Wine Rack’s wine range has the opportunity to be sold into the Bargain Booze network as well, with the Wine Rack band being used in point-of-sale signage in a number of wine-heavy Bargain Booze stores within the next few weeks.

For the year ended March 2013, Wine Rack had revenues of £11.3m, EBITDA of £0.4m and PBT of £0.2m. At completion, Wine Rack had no indebtedness. Revenues have been consolidated on a pro-rata basis for our estimates. We expect to review our earnings estimates at CVR’s interims, once management has given a better overview of the synergy potential of this acquisition.

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