Three months on from the UK’s vote to leave the EU and the true impact remains difficult to predict. Here David Roberts of Olswang shares insight on the early reaction from the industry coal face
Reassuring noises from the Government about keeping the UK open for business, encouraging noises about a lower corporate rate of tax, the suggestion that we may see an increase in more investor-friendly policies when coupled with a reasonably sunny August, a rate cut, a boat load of gold medals in Rio following beating the Aussies 3-0 in rugby union has led to a bit of a feel-good factor in the country. And, I would argue, it has helped to ensure that the hospitality industry has managed to throw off some of the perceived doomsday scenarios pedalled during the Brexit campaign. It feels like we are all keeping calm and carrying on.
While uncertainty is not a happy bed-fellow of business, for the time being at least, nothing appears to have changed terribly much (unless you are trying to refinance and then you may find that process has become a little harder) and it would appear that the retail and leisure industries enjoyed reasonable trading figures and the Bank of England is now thinking that a recession is unlikely. It all sounds a bit too good to be true doesn’t it?
Many will say at this point they are actually more worried about the impact of the living wage and business rate rises as these are known costs to their business than the vast unknowns of Brexit.
The focal point for the industry will, of course, be how difficult or easy Brexit will make it to attract and retain the staff required to continue to operate hospitality-based businesses. London-based hospitality owners need to get their message out to the Government loud and clear that if MPs still intend to leave Westminster at the end of a long day and still be able to grab a pint or a decent rib eye, then unless they can safeguard the sector’s ability to employ EU and non-EU nationals, they may become severely disheartened.
As far as the coal face is concerned, we initially saw hesitancy in restaurant clients making new senior hires coupled with some umming and ahhing about new-site investment – generally because they feared an immediate recession and a potential 10% hit to the top line. However, we are now starting to see new investments, new concepts and new leases occurring again and so my impression is that, for the time being, we will not lose much of the vibrancy that has been developing so beautifully over the past 10 or so years.
While I do not think it is particularly Brexit related, we have seen evidence that the private equity investment community has been more cautious when it comes to valuation. While good businesses with great management and robust EBITDA growth and strong concepts will continue to achieve strong EBITDA multiples at sale time, I feel less confident about the more anaemic cousin concepts of these alpha concepts that are less obviously strong. As a result, I believe we will see groups start to jettison loss-making sites in a bid to repair their P&L and EBITDA performance. Some will see this as two steps backward following large and rapid expansions but the market is now well aware that many businesses expanded too quickly over the past few years and some corrective surgery is now required.
This will probably lead to PE hold times increasing as businesses seek to engage in a bit of nip and tuck to get their offering into shape and with that, I expect to see PE houses start to rejig the terms of their investments to ensure that the carnivorous loan notes that were put in place five years ago don’t start eating not only into management’s final piece of equity but also management’s enthusiasm to come to work.
We continue to see large-scale interest in EIS funding for restaurant start-ups and, in a perfect world, maybe the Government could lift the SEIS threshold to the first £500,000 as opposed to the current first £150,000 because that would certainly give a huge boost to restaurant start-up teams.
We are also starting to see more venture capital funds and development capital funds emerge with the specific aim of investing in business plan and single and double-unit restaurant concepts and this is a very exciting development and will give the traditional early-stage funders some competition.
We are seeing continued interest of US and Middle East brands wanting to come to the UK, and Brexit has not diminished that appetite. We are currently working on several projects that will result in wonderful foreign brands entering the UK market.
We are also seeing concepts start to react to the emergence of a spate of food delivery businesses such as Just Eat, Uber, Deliveroo and now, just recently, Amazon, who are all beginning to compete for a share of the growing delivery market. We are even seeing fledgling concepts shun the traditional need to develop a second and third site and, instead, invest in a central kitchen and sign up with the delivery companies as a much more lucrative way to save costs and generate EBITDA.
Site prices reduced
An additional pleasing development is the co-habitation of restaurants and hotels, and we are seeing more examples of restaurant businesses cuddling up to hotels to pick up the lucrative breakfast and banqueting trade on the one hand and benefit from lunch and dinner on the other. I have long felt that notional walls between hotels and restaurants were unnecessarily high.
We have seen some anecdotal evidence that sites are becoming more available and premiums on transfer of leases are coming down to less stratospheric levels, which will be a welcome development, particularly for central London concepts. We have also continued to see ridiculous premiums being asked for, so I am not convinced that the landlord community has been too spooked by Brexit quite yet, because there remains strong competition between good operators for the best sites.
The picture seems less rosy in the listed sector as TRG continues to suffer from a drop in investor sentiment. My view is that is more to do with the fact that TRG’s stable of offerings are a little dated and suffer poorly from comparison to what has developed all around it and hence believe that we will see an increase in large trade buyers taking on to their books exciting new concepts that they can then use to rebadge some of their more tired and less-loved stock. I thus predict more trade buyers like CDG and also more restaurant funds pursuing a similar business plan.
Finally, the fall in sterling is probably the one definitive consequence that we can track to Brexit and many would argue that such has led to an unexpected boom in summer visitors from the Continent and staycationers all either exploiting the weaker pound or avoiding the stronger euro. Either way, the upbeat trading figures for Q3 have helped to contribute to a slight feel-good factor that many (including me) did not predict the morning after the ‘Leavers’ got their way.
I remain optimistic for the sector – Brexit or no Brexit.
■ David Roberts is a corporate specialist on public and private finance in the leisure sector at international law firm Olswang