Despite the greater prevalence of distress transactions, investors are willing to pay top valuations for businesses that are best in class, according to Graeme Smith, MD at AlixPartners.

Speaking at yesterday’s (18 September) MCA Restaurant Conference, Smith said there was no doubt that there is a much greater level of distress transactions in the market right now, with around half the M&A deals that have taken place over the past 12 months falling into that category.

“In contrast there has also been a theme of top valuations being paid. We saw this with the TRG deal for Wagamama and the Coca Cola deal for Costa,” he said. Adding: “In one stroke TRG were able to change the positioning of the restaurant business in their portfolio; and in addition to that be able to drive synergies to improve the economics of the deal for its shareholders.”

He said there have also been bright spots at the smaller end of the market, with younger brands that are growing successfully attracting investment interest. “This gives us a market which is almost dumbbell shaped,” he said. “It is in that mid-market where volumes are much lower than we have been used to and this is reflected in the level of private equity activity that we are seeing as well.”

For business that are considering investment or the sale of their business, Smith said in order to achieve those higher valuations the strategic fit and the growth story that’s inherent within that business, is of importance to get across. Put yourself in the shoes of the potential buyer or investor… what is it that is really going to demonstrate that strategic fit? He said.

Another prominent theme in the sector over the past 12 months has been operators looking at opportunities for international expansion. “Pret and Costa are standout examples of what is possible and what drives value where there is potential to really grow international sales,” he said.

Smith notes that while the UK is very competitive from a branded restaurant perspective, there is much lower penetration in mainland Europe, for example. “The strongest UK brands are very much in demand overseas, whether that’s in Europe, the Middle East or Asia,” he added, with franchising becoming much more of a focus for operators in terms of how they can take advantage of some of those overseas markets.