In our time poor and cash rich society eating out is the new norm. Formerly considered a luxury and occasion-led, for many eating out has become part of daily life, with what was perhaps a monthly occurrence now more likely to be a weekly one at least.
A broader range of people and age groups are now choosing to dine out, displacing eating at home. Consumers are more adventurous in their approach to food than in the past, and have realised that it is often easier and cheaper to try a new taste experience in a restaurant than at home.
The multicultural nature of British society has been one of the factors driving the increased diversity of national cuisines available to UK consumers. This trend towards greater diversity is most apparent in the UK’s major metropolitan centres, such as London, Leeds and Manchester. In addition to the greater variety of cuisines available, dining patterns have also changed – with dawn-to-dusk dining more commonly available – and the range of price points wider.
Inexpensive dining has broadened out beyond the traditional chicken, burger and pizza fast-food chains.
As a result of these changes in eating habits and in combination with the trend towards on-line shopping, the face of the high street is changing. Many high street general retailers have lost out to internet shopping, which has created vacant retail space. Landlords have been prepared to offer deals on leases and more casual dining businesses have been moving onto the high street.
At the same time, the supermarkets are capitalising on the shift to online and convenience shopping by building out their smaller high street outlets. In a recent development, some supermarket retailers are combining the two trends. In August, 99p Stores introduced a new coffee and bakery concept in its 250th store, which it opened in Northampton. The concept will be rolled out across a number of the company’s stores, selling a range of baguettes and pastries and offering customers a coffee and pastry deal.
The trend for growth in casual dining looks set to continue, as consumers’ incomes begin to increase and desires for different dining experiences expand, leading to a rising number of dining occasions. This environment will encourage future transaction activity – both buy and build and also potentially consolidation.
These broad, structural trends in consumer behaviour are underpinning M&A activity in the sector and the recovery from the recession is continuing with year-on-year increases in deal volumes. Recently, buyers have paid robust valuation multiples, reflecting the demand for quality assets which are highly scalable. For transaction multiples, the overall adjusted average from 2012 to the present is 10.7x trailing EBITDA, which compares with trading multiples of c.8.4x – 13.6x trailing EBITDA for similar quoted companies.
The predominant investment theme evident from recent M&A is the active role of private equity. Demand for quality assets has been strong and private equity has been reinforcing its presence in the restaurant space in recent years. Private equity groups have been particularly active in roll-out opportunities in the casual dining and restaurant sectors. In April, for example, the restaurant group Gusto Restaurants was backed in a £10 million MBO by Palatine Private Equity and in July, Risk Capital Partners invested in InnBrighton, which will be renamed Laine Pub Company. Last year,
Graphite Capital completed the management buyout of London-based steak restaurant group Hawksmoor which is rolling out a second brand named Foxlow, while Close Brothers Private Equity bought Cote Brasserie for £100 million last September.
Earlier transactions on this same theme include Bowmark Capital’s backing of the MBO of London restaurant group Drake & Morgan and Piper Private Equity’s investment in Caribbean restaurant chain Turtle Bay.
Private equity and overseas buyers alike are also prepared to take on distressed businesses. In April, Enact, a fund recently launched by private equity group Endless, bought the West Cornwall Pasty Company brand and 35 of its outlets from its administrator. On a similar theme, last August Kuwait’s Kout Food Group bought the struggling Little Chef roadside restaurant group for £15 million. Kout already runs more than 40 Burger King and KFC outlets in the UK and has exclusive franchises in Kuwait for Burger King.
The wide range of different cuisines and restaurant concepts on offer in the UK, particularly in the major cities, continues to attract the interest of overseas buyers looking to import those formats into their domestic market. In July, for example, Gondola Group sold the PizzaExpress chain to China-based private equity firm Hony Capital for £900 million. Gondola also owns ASK, Zizzi and recently sold hamburger chain Byron to Hutton Collins.
Also of interest are the following themes:
The experimental corporate buyer
Corporates are continuing to roll out their formats and are adopting alternative versions of established models – including all-day dining and express sites. Companies are also showing appetite to be more experimental with acquisitions as they seek to diversify, although in some instances it is too early to say whether these acquisitions will form a permanent part of their portfolios.
2014, for example, saw brewing and pub group Fuller, Smith & Turner expand into the restaurant sector with the purchase of a 51% stake in The Stable, a craft cider and pizza restaurant business. They also introduced their own coffee brand, Brewer Street a few years ago and recently opened their first stand-alone coffee shop. Tesco meanwhile, owns a significant minority stake in coffee shop chain Harris and Hoole and in 2013 acquired restaurant chain Giraffe for £48.6 million.
Aggregators of dining out experiences have also shown interest in UK assets. At the start of September Dutch company DIDIX announced the acquisition of tastecard, the UK’s number one Diners’ Club, which has over 1.5 million members and 7,000 partner restaurants. DIDIX is a market leader in gift cards, leisure promotions and restaurant discount diners’ clubs in the Netherlands, the UK and Belgium. Earlier this year DIDIX also bought subscription-based dining club Gourmet Society and Restaurant Choice, a restaurant gift voucher scheme.
Recent IPO activity
Patisserie Valerie’s successful initial public offering (IPO) in the summer demonstrates that there has been appetite for the restaurant sector in the UK, which has traditionally been low compared to the US public markets (the US markets having more than three times as many listed restaurant entities than the UK). ISDX-listed Fulham Shore, a cash shell set up to acquire restaurants, announced in September that it would be moving to the AIM market. It also announced that it had acquired Greek restaurant chain ‘The Real Greek’ for £13.9 million.
Whilst there was strong initial momentum early in 2014, an increased air of caution has fallen over the markets recently as several IPOs (including that of Aldermore, Fat Face and Virgin Money) have faltered in increasingly volatile conditions as a result of wider global macro-economic and political sentiment.
Rising appetite for debt finance
Recent debt market activity points to increased bank and capital market appetite for leverage, with a number of businesses turning to the bond markets for funding. The most notable was 2013’s issue by Soho House, the London private member’s club, of a high yield bond for £115 million despite having only £9 million EBITDA. The issue was unusual because £200 million has traditionally been considered the minimum size for a bond to ensure liquidity in the secondary market and £50 million the minimum EBITDA to avoid excessive leverage.
At the other end of the spectrum, crowdfunding has also been used as a source of funding in the casual dining sector. In June, London-based Mexican chain Chilango turned to its customers in an attempt to raise £1m to finance the opening of three new restaurants. To date Chilango’s ‘Burrito Bond’ has raised more than £2 million with the offer of free burritos for investors being used to sweeten the deal.
Deal activity set to continue
The casual dining industry is populated by a large number of small operators, which can grow very quickly if they are positioned correctly and are able to secure the correct funding. These successful businesses can rapidly become challengers to the more established chains. We believe that there will continue to be a significant number of transactions in the sector, through consolidation, diversification and ongoing concept roll-outs.
Rupesh Patel is an associate director at Grant Thornton UK LLP. The full Come Dine With Us report can be found at http://www.grant-thornton.co.uk/en/Publications/2014/Come-dine-with-us/
