Inside Track by Mark Stretton
The debt market may be closed for business but the deal market is most definitely open. And how. There is seismic activity amongst the global brewers, led with the battle for Britain’s biggest beer maker Scottish & Newcastle (S&N). Carlsberg and Heineken have put the company in play. In America SABMiller, which could yet join the fray for S&N, has formed a JV with Coors in an effort to take on the might of Budweiser brewer Anheuser-Busch, the initial fling in what some suggest could become a fully-fledged marriage. In the UK restaurant and pub arena, it is the tension between the public and private markets that compels. In the wake of the credit crunch it seemed inevitable that the power of private equity, so long a driving force in this market, would diminish. Now would be the time for trade players to take those strategic steps that the deeper pockets and deeper debt packages available to private equity had prevented (note Restaurant Group’s acquisition of the excellent Bruning & Price pub business). It would also be the time when the stock market – for so long inferior because of inferior valuations – would make a return as a viable home for eating and drinking-out groups. That certainly seemed to be the case as Pret A Manger, Wagamama and Gaucho Grill all seemed destined for the public markets. EAT and Tragus Holdings were also there waiting in the wings, with a watching brief. But the public markets have not proved to be the promised land. Pret was the first to be diverted from its original course because of overwhelming interest from private equity groups, who were all willing to value the business at a superior level to public institutions. An announcement is expected any day now, with Bridgepoint and Lion Capital fighting it out. Next was Wagamama, arguably one of the finest – and most “together” – concepts in eating out, in terms of positioning, execution and quality. Its owners had appointed Numis to advise on a float but institutions were decidedly unimpressed by the £200m valuation, or £225m including debt. “Come back when its £50m less” was the message. It may be that the share-buying institutions thought the valuation was excessive or that they thought they could leverage the situation, given the perception of private equity’s diminished currency. Either way, Wagamama and its advisers have turned their backs on the public arena, with management ready for another buyout. Once again private equity groups were willing to pay more. It is a situation that Dominic Walsh explores more fully in the next issue of M&C Report – out next week. Gaucho Grill, the Argentinean steakhouse business led by Zeev Godik, is apparently still on track to make its public debut next month. The pre-IPO research suggests that there is scope for 50 UK restaurants – from a current 10. Restaurants open for more than a year at June 2007, were delivering a mightily impressive average return (CROCI) of 64%. The only other business I know of delivering this sort of return across the pub and restaurant market is Carluccio’s (answers on a postcard please if you know different). Sources suggest that the group will still get its IPO away, even with its valuation of some £8.5m to £10m a restaurant. Whether Tragus, which is thought to be eying an IPO in Q1 2008, and EAT, which is the latest to engage in talks with potential advisers, will become public remains to be seen. Again, there is a distinct possibility that private equity will again attach a higher value to these businesses than the institutions. Who is valuing these businesses correctly remains to be seen, but one thing is clear: private equity is still a force to be reckoned with in this market. The larger groups are awash with money raised prior to the crunching of credit. These groups appear to be taking something of a punt on the debt side, with an anticipation that this is something that can be addressed at a later date, when the debt market reopens. They are still looking to sink their equity into businesses with legs, and it’s clear they still see plenty of opportunities in this market. Restaurant 2007 Leading analyst Simon French, of Numis, and leading deal specialist Anthony Gutman, of Goldman Sachs, will present their views of the current market at Restaurant 2007, in London on November 8. To secure one of the few remaining places at this key event please call M&C Report’s Frances Bickley on 01293 846578