2015 was yet another big year for deal activity in the restaurants and bars sector, says Kieran Lawton, M&A director at BDO: As predicted in the winter edition of our sector report last year, 2015 continued where 2014 left off and there was a consistent level of high profile deals throughout the 12 months. Our belief is that 2016 will herald further transaction activity but that pricing will not be excessive.
2015 opened with a bang, with TPG’s £304m take-private of Prezzo narrowly gaining sufficient shareholder approval to complete the transaction in January. One month later, Bridgepoint completed the acquisition of ASK and Zizzi from Gondola in a £250m deal. Both deals, along with Fulham Shore’s acquisition of Franco Manca, suggest Britain’s affection for Italian food continues unabated. Azzurri (the company formed to house the Ask and Zizzi brands)later bought Coco di Mama as well, indicating that Bridgepoint are looking to do more than simply roll out more of their existing assets.
There were significant, high profile exits in the year, with Quilvest selling YO! Sushi to Mayfair Equity Partners for £81m in November and, prior to that, Bowmark Capital and Kaupthing exiting Las Iguanas and La Tasca respectively. The latter two were both sold for healthy multiples to Casual Dining Group (formerly Tragus) in a clear sign that the Steve Richards-led group is looking to expand quickly before a much-mooted exit for the debt funds that it is currently backed by.
Other smaller but no less significant deals included Active PE’s successful investment in the much-respected Honest Burger, suburban Thai concept Giggling Squid’s sale of a stake to the Business Growth Fund, and the Palatine PE-backed buy-out of cocktail and restaurant chain The Alchemist from Living Ventures (LV) – the second Palatine-backed buy-out of an LV concept in a little over 12 months, following the MBO of Italian restaurant chain Gusto in 2014.
2015 also saw alternative methods of funding and financing continue to be explored by smaller operators. Tossed completed a successful crowdfunding exercise this year and, at the time of writing, Chilango are finalising a new investment round via CrowdCube on the back of the success of its ‘Burrito Bond’ last year.
Red’s True Barbecue, the much vaunted Leeds-based smokehouse concept, received £5m from a media-labelled ‘Super 8’ of industry investors to support its rapid expansion, and the craft beer market continued to make the most of crowdfunding, with Camden Town Brewery beating its £1.5m target despite selling a stake to a Belgian family office at a lower valuation part way through the process.
Camden is an example of the resurgence of craft beer, which may pave the way for more transactions along the lines of Meantime’s sale to SABMiller earlier this year. This type of transaction may itself present a challenge to craft beer producers and operators. Brewdog, itself a hugely significant player in terms of raising money via a loyal customer network, immediately stopped selling Lagunitas in its bars following Heineken’s acquisition of a 50% stake in the Californian business.
This presents an interesting moral standpoint for successful craft beer producers: how to continue to grow and maintain value without ‘selling out’ and, in the process, potentially damaging its established customer base. Either way, craft beer continues to attract investor interest.
So, all in all, a busy year for transactions and fundraising. Arguably, though, the deal of the year was CBPE’s exit of Cote less than two years after they invested. BC Partners’ £250m purchase of the French brasserie chain may well yet prove a sound investment, but a 2.9x return for CBPE after such a short period of ownership suggests they bought, and exited, very well indeed.
All of this deal activity, successful exits and reports of double digit multiples becoming the norm would suggest this is a seller’s market.
Private equity will remain interested in cash generative roll-outs and there is much talk of trade buyers coming back into the market place, particularly following CDG’s busy year.
However, my personal view is that this is a somewhat simplified and perhaps misguided opinion. Double digit multiples are rare you should not believe everything you read in the papers! And who are these various trade buyers? True, Steve Richards and his team made a significant play this year but theirs is a somewhat unusual
case. As a firm, BDO is extremely active in the sector in terms of transactional activity and, from what we’ve seen and continue to see, the fact remains that the most likely exit route for vendors is private equity.
Even then, vendors need to be realistic about pricing. Private equity would generally be looking at a valuation in the 7-10x range, with only strong, rolloutable concepts with very strong management teams, scalable financial and operating systems and a differentiated offering commanding multiples at the higher end of that range. That is not to say that deals at the lower end of that range reflect bad businesses or that the vendors don’t get a good deal. It is just that such businesses may require more work to get to a position where another transaction in 3-5 years is not only viable but worthwhile from an investor’s point of view.
True, there is still the opportunity for a buyer to come in and pay a strategic premium for a particular asset – an overseas bidder keen to enter the UK market, for example. But such approaches are rare; most mid-market restaurant deals involve UK buyers and sellers.
We have seen increased interest in UK assets from overseas private equity, particularly from the US, but only the larger groups or those that could be consolidated into a multi-brand holding company will attract serious interest.
Perhaps that is why more are considering flotation as a preferred exit route, or running a dual (or triple) track sale process whereby a float and a private equity or trade sale are investigated at the same time. Patisserie Valerie is a recent flotation success story which gives credence to the possibility for others and, at the time of writing, Des Gunewardene’s D&D is strongly rumoured to be preparing itself for a listing.
Listed companies in the sector tend to trade at around 12-15x earnings, and having flotation as a viable exit option should give private equity even more comfort that they can make a return on their investment (and that the number of exit routes has increased).
However, those considering a transaction event should bear that fact in mind: if a listing gives an exit at, say, 12x, then it would make little economic sense for investors to pay more than that for an asset unless there was significant strategic value and/or a raft of synergistic benefits that made the headline multiple make sense.
That may all seem somewhat negative and pessimistic given that I remain of the opinion that M&A activity will continue to be strong. It must also be borne in mind that the restaurant sector tends to attract higher multiples than other industries. However, there are already signs that pricing in the sector is becoming more measured and buyers are not prepared to pay over the odds. Yo! Sushi was reported to be aiming for a price of £120m but ended up at just over £80m after a number of buyers had withdrawn from the process.
At the time of writing, the Ed’s Easy Diner deal (which has been talked about for some time) has still not completed but, assuming it does, if rumours are true it will be priced below the £100m the vendors were reportedly looking for.
That is not to say either are bad businesses – they’re definitely not. Both are great concepts with further roll-out potential and both attracted significant interest from buyers. It’s more the case that the initial price expectations, if true, were excessive, and buyers are wise not only to what a reasonable multiple is but also what a reasonable run-rate should look like.
2016 – What’s in store?
All that considered, our belief is that 2016 will herald further transaction activity but that pricing will not be excessive. The aforementioned Ed’s has a number of interested parties still fighting it out at the time of writing, and Gaucho is also reported to be midprocess.
One would expect both of those deals to complete early or mid 2016, assuming all goes well. Looking at PE portfolios, the likes of Pho (Livingbridge), New World Trading Company (LDC), Be At One (Piper) and Abokado (Kings Park Capital) are probably coming to a point where an exit may be considered, although none are thought to be on the market as things stand.
Turtle Bay continues to be talked about positively by investors but, having only invested in 2013 and with a recent refinancing by Santander, it may be at least a year too early to expect an exit for Piper.
‘Food on the go’, particularly the healthy version, continues to be of interest to investors although no-one has yet made a real play for this area of the market. The interesting thing is that the aforementioned Abokado, along with a number of others such as Vital Ingredient and POD, have significant roll-out potential beyond their current estate in a sub-market that is of interest to buyers. However, their respective estate sizes are still relatively small and unproven beyond their London/City heartlands, which creates doubt as to the potential scale of any roll-out. One would expect some activity, though, and there remains potential for a consolidation play.
The Thai sector is another that is worth watching, with Giggling Squid having just received funding from BGF, Busaba continuing to be backed by Phoenix and Thai Leisure Group sitting on the Santander money it raised last year. These are three significant players vying to be the first to establish themselves as the first truly national Thai brand.
In a similar vein, Barburrito’s Pinto acquisition is a statement that the BGF-backed Mexican burrito group is willing to take on its slightly larger and most significant UK rival in Quilvest’s Tortilla. With Chilango and others also with cash in their pockets, it will be interesting to see which can use its financial backing to establish itself as the primary national operator.
Finally, it would be remiss not to mention Bill’s and Loungers in this piece, as I do every year, it seems. One day, the prediction that one or both of them will be subject to a significant transaction will be proven correct. Maybe this is the year…
