While it has certainly become more challenging to secure investment in parts of the restaurant market, the past 12 months has seen continued M&A and investment activity across the pub and bar space. The breadth of this activity highlights the current strength of this part of the sector, and this trend does not look like slowing anytime soon…
It is always good, when you come to write an article on M&A activity in a sector, to have a number of nascent examples to back up your point. Thanks to the health of investment in the pub and bar sector over the last couple of years, there were already a plethora of examples to reference, but the announcement that Stonegate Pub Company had agreed to acquire Ei Group (EiG) for c£3bn (including debt) to form what would be the biggest pub and bar group in the UK – as pen was being put to paper – was a rather significant cherry on the handsome cake. Following on from Heineken and Patron’s acquisition of Punch, and C&C and Proprium’s investment in Admiral Taverns, this was a further significant statement on the health of the industry, and appetite from investors, and should lead to more opportunities and increased focus on consolidation over the coming 12 months.
Strength of the market
The breadth of investment and M&A activity across the previous year speaks to the strength of the pub and bar market. Activity has ranged across a number of what could be described as different verticals in the space, such as: high street venues (Loungers, Be At One, Novus); experience-led propositions (Vagabond, Flight Club, Swingers, Albert’s Schloss); premium food-led pubs (Redcomb Pubs, Food & Fuel); and freehold property-backed investments (EiG commercial arm, Wear Inns). As this list of examples illustrates, quality operators – the majority of which are operating leasehold businesses – continue to stand out, securing new investments and the ongoing trust of landlords and developers.
There are a number of key factors that drive continued investor interest in the sector. In consideration of how the market reached this point, and from our work with CGA on the Market Growth Monitor (MGM), we can see that pubs and bars had not experienced the same supply explosion as restaurants in previous five- to seven-year period. This has given rise to more stable and predictable trading.
The MGM highlights that from 2011 to 2018 there was a supply boom in restaurants driven by private equity investment in the sector, and the backing of brands in rollout mode. At the same time, the number of food-led pubs has been resilient, going hand-in-hand with a slowdown and stabilisation in the decline of drink-led venues over the same period. In fact, by March of this year, the rate of restaurant closures had accelerated beyond the pub sector for the first time, for both food-led and drink-led pub and bar venues.
Investors are also attracted to the pub and bar sector’s ability to ramp up experience-led propositions to drive sales growth, in stark comparison to the restaurant sector’s increasing reliance on delivery – potentially a double-edged sword. Currently one of the biggest issues in the restaurant sector is coping with delivery players, however, in the pub market you can’t replicate the experience found on-site as easily at home. This is a positive and increasingly important differentiator for the sector.
Also, or perhaps as a consequence of the above, pubs have been trading positively and stably over the past 18 months, again making the sector more attractive to investors. Indeed, over the past two years pubs achieved positive like-for-like sales growth in 19 months of 24, compared to just nine months achieved by their restaurant counterparts (according to the Coffer Peach Business Tracker). For now, the sector is lapping some tough comparables with last year’s good weather and football World Cup, but it still benefits from a broad trading window – driving growth through different day parts and revenue streams, such as accommodation, which is becoming an increasingly significant point of difference for some. More clarity on underlying performance will come after the summer.
The broadly positive performance has led to interest from both trade and financial buyers, which has supported consistent M&A activity over the past 12 months. Already this year, there have been 15 completed transactions, the highest since 2014. This has seen valuation multiples tick up towards the top end of the range 10–12x EBITDA, with transaction valuation multiples in line with recent averages – LTM is 10.9x (Stonegate’s proposed acquisition of EiG is valued at 11.4x). There has been a good balance of buyers, with trade just edging private funds over the last few years in deal volume terms.
Higher yields on offer
In addition, real estate funds are increasingly looking to pubs as a viable long-term asset class that offers higher yields than other alternative real estate asset classes.
This was highlighted by Davidson Kempner’s acquisition of EiG’s commercial properties. They have also come alive to the potential for additional value to be driven by operating pubs more effectively, in addition to growth in the property value, and are targeting proven management teams to run their estates – see NewRiver’s acquisition of Hawthorn. The arrival of real estate funds has the potential to drive up freehold valuations due to the volume of available capital and their lower return requirements.
We still believe the universe of potential M&A targets is significant, however the market is highly congested among smaller pub and bar groups. There is value in scarcity and the opportunity for businesses is to grow in size to where they exceed £40m turnover, meaning they stand out from the crowd. This scale makes a business more attractive from an investment perspective, which we expect to be reflected in their valuation.
The proposed acquisition of EiG by Stonegate could trigger follow-on corporate activity in the sector, particularly in tenanted and leased pubs in the short term. Stonegate has indicated it expects to dispose of 100 sites post-transaction to satisfy any local competition concerns.
On the flipside, that transaction could potentially see one of the sector’s most consistent buyers take a step back from the marketplace while it works through and digests one of the industry’s most significant deals.
In terms of outlook, market dynamics continue to remain attractive to investors. The sector’s like-for-like sales performance should normalise over the coming months following tough summer comparables. As ever, quality operators will continue to be in high demand. Investors continue to seek out businesses with strong management teams, compelling and differentiated propositions, appealing growth profiles and positive trading. Return on capital remains a vital metric. Time for another round of activity.
Graeme Smith is managing director and head of corporate finance at AlixPartners
AlixPartners: The bar remains open
It is always good, when you come to write an article on M&A activity in a sector, to have a number of nascent examples to back up your point. Thanks to the health of investment in the pub and bar sector over the last couple of years, there were already a plethora of examples to reference, but the announcement that Stonegate Pub Company had agreed to acquire Ei Group (EiG) for c£3bn (including debt) to form what would be the biggest pub and bar group in the UK – as pen was being put to paper – was a rather significant cherry on the handsome cake.