A problem like Tootsies

There was talk last week among the sector’s deal-making fraternity that things were looking up. “M&A practitioners talk the market up” isn’t the most extraordinary headline we could ever write so such chatter comes with health warnings, but those in the know seemingly detect the air of change. In the past two or three weeks, activity has apparently been building as more would-be buyers become engaged in various deal processes underway across the eating and drinking-out market. It is a sign, they say, that we are at the bottom. Or a sign that enough people think we are at the bottom. Maybe it is a false dawn, but I guess the proof will be in the deal doing. One business that has been up for grabs for a while but that has struggled to get away is Tootsies. The American diner chain was in the news for all the wrong reasons after owner Clapham House wrote down its value to zero, a tacit admission of what an eventual sale is likely to yield. In truth Clapham had little choice. Bought three years ago for £25.4m, the price has ticked down in the past 12 months from around £20m to around £5m at the moment. Would-be buyers have come and gone for the 38-year-old chain, with a lack of funding options for potential acquirers cited as the major stumbling block to any deal. Now analysts refer to the diner brand as something of a Millstone around Clapham’s neck, dragging the whole group down. As I wrote in Restaurant magazine a couple of weeks ago, the list of runners and riders that have looked at buying it is long – D&D London, Tragus, Gondola, Luke Johnson, to name a few. Like Little Chef, one of those other unloved restaurant brands, Tootsies has become something of a pet project for people in the casual dining market. Despite its malaise, the potential of the brand still excites plenty of people, and everyone has an opinion on how it might be saved. Some however believe it’s beyond salvation. And that would appear to be Clapham’s assessment too. By valuing it at nothing, it has opened the door for a “site play”, whereby Tootsies can be sold as a property pipeline, to be converted to other trading formats. But my money says it will not be any of the established groups that take it on. The major problem is that while the 22-site business (it also includes a handful under the Dexters brand) has about six or seven top sites, it has another third that are OK-ish and a third that are fairly dreadful. Most companies are trying to ship the odd dog of a site that is dragging performance. Right now in this trading market the prospect of taking on six more problem sites and a further six or seven that could go either way does not sound like a compelling proposition. Why take the risk? This is one for a focused management team, backed by investors, with the vision to take a punt. One further complication in all this is the dreaded pre-pack. Clapham must be surely mindful of who they sell to for fear that the worst performing sites will come hurtling back towards them. Of course, just as interesting is what happens to Clapham once it is shorn of Tootsies. Nando’s-owner Capricorn Ventures is sat on the share register with some 25% and is surely biding its time – to see how low the share price goes – before making a bid.