Prezzo is the latest business in the sector to be put in play in another sign that genuine confidence is returning to the market. But what does the offer for the Jonathan Kaye-led restaurant group mean for the business and its chief executive?
Six years ago, the Prezzo management team investigated taking the business private. John Lederer, the then managing director of Blanc Brasseries and a non-executive at Prezzo, was appointed to chair a committee to represent the interests of independent shareholders, and assess offers.
However such discussions faltered due to the conditions of the banking market at the time. It is an indicator of how much the debt market has improved that the same management team has again been tempted to explore an exit. It has appointed Altium Capital to generate and assess interest in a business, which currently operates c245 restaurants, of which just over 200 are under its core eponymous brand, 37 under Chimichanga, its Mexican brand, and a small number of Cleaver burger.
Rumours had been gathering pace over the last couple of months that the company was looking to assess its options, with indications suggesting that the Kaye family, which holds 57% of the company’s shares, were looking to exit the business they founded near the end of 2000 and floated on AIM two years later. Whether the speculation is true, and the offer from TPG Capital and Advent International is a welcomed one, a leveraged buyout would bring something into the business that the Kayes are adverse to and that is debt.
The group’s biggest shareholder is Phillip Kaye, Jonathan’s uncle, and founder of the Golden Egg and Garfunkel’s chains, holding just under 44% of the company’s shares, followed by Jonathan himself with just over 8%, and then his cousins Adam and Sam, with around 2.5% each.
Prezzo has a debt-free balance sheet and the Kaye’s are known for their dislike of highly-leveraged businesses. The offer for the company comes after it had itself taken a long hard look at acquiring Strada, but it is understood that taking on a lot of debt to do the deal caused Kaye to back away from making a concrete offer. If the Kayes have welcomed this bid, and any successful deal would obviously need their blessing, this has to give a clear indication that they want out of the business. Would Jonathan Kaye be part of any departures?
For a long time, Jonathan Kaye and Prezzo itself were underestimated by the sector in general. Indeed, it was only last year that Kaye was nominated by his peers for the top award at M&C Report’s Retailers’ Retailer Awards, overdue recognition of the successful growth and evolution of the business, especially during the downturn, under his understated stewardship.
Last month, the company reported a “strong” start to the year with a 17% rise in adjusted EBITDA to £14.6m in the 26 weeks to 29 June, and said it expects to have opened 25 new restaurants by its year end. Revenue grew 16% to £92.4m and adjusted pre-tax profit was also 16% higher at £9.8m.
The group’s eponymous brand continues to produce decent growth, however it is thought that the forecast given on the roll out of Mexican brand Chimichanga isn’t as bullish as 18 months ago, while the expansion of fledgling format Cleaver is currently on hold as the concept is assessed. It is the strength and continued rollout potential of its core brand that will have piqued interest in the business in the group and the opportunity for injecting a significant amount of debt. There is also a possible international play to be worked on.
There are also not that many opportunities out there of this scale. Prezzo could be one of the last brands, along with Nando’s and maybe Frankie & Benny’s, to reach the level that PizzaExpress, which currently has c435 restaurants in the UK, has achieved.
Paul Hemming, partner at advisory firm Zolfo Cooper, says: “From our experience looking at the Strada process there is a strong appetite in the market from private equity to buy assets that have proven remarkably resilient throughout the downturn and continue to have strong growth prospects from roll out.”
TPG Capital, formerly Texas Pacific Group, which includes Punch Taverns, Spirit Group and Debenhams amongst its current investments, and Advent, which is majority owner of Bojangles, a US fast-food chain, have been given until close of play on 30 October to put a formal offer on the table or walk away. With the amount of private equity circling the market it would be surprising if their offer didn’t bring out another bidder. At 135p, Prezzo would be valued at £317m and it would be surprising if the business was taken private under its current share price.
Any successful bidder for Prezzo will immediately have the word consolidation thrown at them, and it might be attractive to speculate about the synergies in acquiring say ASK and Zizzi, while ignoring numerous co-location issues. However, as Hugh Osmond has indicated through his initial plans for Strada, people and businesses tend to buy things and assimilate them before moving on to the next acquisition.
With the likes of Spirit, TGI Friday’s and YO! Sushi also in play, it is tempting to say that this is a new dawn for M&A activity in the sector. Indeed, what price that The Restaurant Group will be the next public company to come under the microscope? While talk of a new dawn may be too grand, after all these things do come in cycles, it is true that people/investors are being bolder than was the case a year to 18 months ago. It should be an interesting watch.
