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Nightcap makes initial acquisition

Bars operator Nightcap (LON: NGHT) is making it first acquisition since joining AIM. There has been sharp rise in the share price since the original placing at 10p a share and Nightcap is trying to raise a further £4m to help pay off borrowings of the Adventure Bars Group and finance its expansion.

Nightcap joined AIM in January and the share price has risen despite the company’s bars being closed for most of this year – and some are still closed. The share price has been over 37p, but it fell 4.5p to 29p after the announcement, having been as low as 27p.

Shares are being issued at 21p each to pay for Adventure Bars Group. Management has even persuaded two creditors to take shares at 21p each for the £415,000 they are owed. That is still well above the flotation price, but it shows how toppy the share price had got.

Nightcap is paying £2.5m with £1m in shares being paid initially and up to £1.5m (at the same share price) dependent on performance in the two years from 1 July 2021. The cost is much higher than that because the acquisition comes with around £4.3m of borrowings, of which between £1.28m and £1.78m will be repaid and a £110,000 convertible (at 21p a share) issued to the lender. The remining debt will have a reduced interest rate of 3% per annum.

Adventure Bars

The acquisition was founded in 2005 and includes seven London-located theme bars, an outdoor bar and entertainment venue in Birmingham, an unopened site in Birmingham and a 50% stake in Bar Elba, a London roof-top bar. There are seven different bar brands. The ones highlighted by Nightcap are Tonight Josephine, Bar Elba, Luna Springs and Blame Gloria. Nightcap believes that there is scope for up to 40 sites.  

Nightcap is not acquiring the Lost Alhambra or Jimi Loves Gloria bars that were part of the group.

The two outdoor venues, Bar Elba and Luna Springs, generated sales of £334,000 in their first week after lockdown was eased.

Finance

Unsurprisingly, last year Adventure Bars Group made a small loss on revenues of £6.6m – including 100% of Bar Elba sales. In the year to January 2020, an operating profit of £1m was made on sales of £11.9m. If the business can get back to anywhere near that level of profit, then the deal should prove a good one.  

Management hopes that the greater scale will provide better deals when buying alcohol.

Nightcap has reopened five London Cocktail Club bars with outdoor areas, but the rest remain closed until 17 May so there have been limited revenues this year.

At the end of April, Nightcap had £3.5m of cash and £1.3m of borrowings. There will still be net cash after the placing and taking on the acquisition’s borrowings. This will provide finance for openings of London Cocktail Club sites as well as ones for the acquired business. Hopefully, the enlarged business can start to generate cash when all the bars are reopened.

Prospects

This is just the type of acquisitions that Nightcap joined AIM to make. The high share price has made it easier to do the deal at an attractive valuation for existing shareholders.

Nightcap has an experienced management team head by chief executive Sarah Willingham, and it is showing its ability to secure purchases at a price that could be highly advantageous if profitability gets anywhere near to past levels. They also have additional bar brands to roll out in a market where good sites should be easier to obtain than in boom times.

While Nightcap has made excellent progress, the valuation seems a little steep. It may be a good business, but it seems to have the wrong price for the current prospects. There should be good news coming from the opening of the rest of the sites, but short-term uncertainty about trading levels remains. Investors need to take a long-term view if they are considering buying the shares.

The final details of the placing have not been announced. Presumably, the plan will be to place shares at 21p or more if possible. The demand for the placing will be important for the short-term prospects for the share price.

I would not be buying at the current market price, even after the drop. Let the share price settle down before making any decision.

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