Inside Track by Mark Stretton
The public versus private debate has reared its head again. Last week Caffe Nero became the latest to signal time as a public concern, Capital Pub Company unveiled plans to list, while it emerged private equity may prevent Tragus joining the quoted ranks next spring. For the moment the desires of Capital and Tragus to go public place them in a shrinking minority. Although there are clear benefits to both private and public status, it seems that management teams are electing private ownership, especially under the guises of private equity, as an increasingly desirable ownership and funding structure for a company in the eating and drinking-out market. The management of Caffe Nero, led by CEO Gerry Ford, sought a buyout for a number of reasons. One of the primary drivers was that some key investors refused to entertain an international growth story, despite the undeniable success of Starbucks and Costa Coffee - arguably inferior products. A similar problem seems to be hampering the share price of La Tasca, despite the fact that it has four profitable restaurants in the States, and that a whole raft of groups including Wagamama, Nando's and Itsu are heading for America. Lots of food formats and concepts have international legs - if the public market wants to benefit from continuing value creation in the eating and drinking-out sector, it had better get used to it. The Nero executive also became increasingly frustrated over the market's sensitivity. A good example of this was when Ford, and finance director Ben Price, top-sliced share holdings earlier this year, having seen the stock move up from 19p to north of 200p over a six-year period. Following the sale, the share price collapsed and shareholders were critical. It seemed that those that benefit from long-term upside expect board directors to adopt some puritanical approach to share ownership: if you sell, something must be wrong. Conversely private equity positively encourages management teams to benefit from significant increases in company values. Market jitters also hit Nero when Starbucks issued numbers earlier this year, showing that consumers did not necessarily slake their thirsts with hot milky coffee during heat waves. It's becoming less clear to me why anyone in this sector would want to be the director of a public company, when other forms of ownership seem more appealing. The critical caveat to private equity is of course that it is important to identify the right partner, one interested in long-term value creation. But those involved with the public markets need to be a bit more tolerant of aggressive pay schemes that recognise and reward pre-defined success. They also need to be more patient when it comes to long-term brand building. Being a public company has its benefits if you want to raise money to grow, to use paper to acquire other companies, or provide backers with an exit. It has worked for the Kaye family and is why Tragus and Capital are eying stock market debuts. But it seems the lion's share of deals will be public to private, not the other way. There have been murmurings that Nero, at 270p a share, is going private on the cheap, yet there were plenty of institutions who declined to buy shares at 180p during investor roadshows, before this buyout plan emerged. There is also the spectre of a 300p indicative approach - thought to be from Whitbread, which owns Costa Coffee. It is difficult to know how real the approach was, but it's very difficult for a company to open its books a rival not necessarily known for its deftness of touch when it comes to doing deals. Most analysts agree that this is a fair price and that non-executives appear to have wrought a good deal for shareholders, especially given the management's 43% stake. Without wanting to sound like the Ford fanclub, Caffe Nero, in both trading and share-price performance terms, is a fantastic success story. Maybe it's time that institutional shareholders said “well done and thank you” to the management team.