Inside Track by Mark Stretton
Like London buses perhaps you wait around for ages and then three restaurant IPOs come along in quick succession. No sooner had Gondola Holdings joined the public ranks than Carluccio’s, the Italian deli and cafe concept, announced that it too would be listing in the coming weeks. It will join AIM, the junior market, in a process that is expected to value the business that Antonio and Priscilla Carluccio launched seven years ago at between £50m and £60m. So why should institutions want a piece of Carluccio’s? Differentiation would seem to be the key sales story, a supposition supported by pre-IPO research obtained by M&C. Firstly, it is genuinely different. It is the only authentic Italian restaurant cum cafe cum deli in the UK. It trades all day. The deli accounts for 22% of sales. What is does have in common with a string of other eating out companies is a proposition that appeals to a wide audience. With an average spend per head of £11.50 it is firmly at the value for money end of the market, albeit at the upper echelon. One of the most staggering numbers that leaps from the research document is Carluccio’s return on capital. This business achieves a cash return on cash invested of 64% – an exceptional figure that is well north of its peers. This is driven by all day trading. Some 24% of Carluccio’s daily turnover is derived either morning (pre-lunch) or afternoon (post-lunch, pre-dinner), which is significantly different to most restaurant businesses. Average sales per unit are approximately £1.7m, which equates to more than £32,000 per week. This compares to The Restaurant Group’s average turnover figure of £1m (£19,200 a week) and La Tasca’s £1.1m (£21,100 per week). The business is debt free and comfortably fund between five and eight new stores per annum from cashflow, also leaving room to pay a dividend. It seems banal to say it, but growth and site selection is the key for this business as it remains to be seen where Carluccio’s can go. To date the concept has largely been restricted to within the M25. Its premium nature means that Walsall or Kidderminster are probably not destination targets for the site acquisitions team. Carluccio’s still has to demonstrate that it can cut it out in the provinces. Sites in Windsor and Tunbridge Wells have under-performed relative the rest of the business although according to the company there are site-specific reasons for this. Encouragingly, site in retail locations such as Bluewater and Brent Cross are among the highest returning assets in the Carluccio’s portfolio. Research undertaken by Inquira Consulting suggests there are 69 locations across the UK where a Carluccio’s could be opened as soon as a site is found, with a further 46 additional locations in the medium term. Together with Carluccio’s existing 23 sites (soon to become 24) this means there is a UK universe of around 140. Clearly this does not include international expansion, a growth driver that many “new establishment” concepts such as Wagamama and YO! Sushi are currently exploiting through franchises. It also does not include further in-store concession opportunities or travel locations. Carluccio’s own management have pinpointed 25 potential locations for immediate attention. Most of these remain within London although, significantly, the company recently recruited an M4 corridor manager to exploit opportunities in locations such as Bath, Bristol and Cheltenham. Research by Altium, the nominated adviser to its IPO, takes a more conservative approach to growth but suggests the Carluccio’s brand could grow to 100 sites across the UK. This means there is enough growth for the next eight to 10 years, which amounts to a fairly expansive event horizon, in City terms. Another key sales point in this process is that the business is performing well. Profits last year jumped 45.8% to £3.5m on sales up 32.4% to £36.8m. Last year like-for-like sales growth was ahead by 9.2%. The year before it was 9.4%. Three-year CAGR growth projection is 22%. The company is currently marketing to institutions and is expected to float within the next three weeks. It looks like a flyer although Carluccio’s advisers have attached some lively value expectations to the business. They argue that its exceptional returns profile, because its at the early stage of its development, the unique positioning of the company alongside the self-funding nature of its expansion means that a premium valuation is deserved. To be exact, Altium suggests a value equating to 18x its December 2006 earnings (post tax) is justified. This would value the company at £55.8m. There is probably an element of IPO psychology in this valuation. Advisers tend to identify a pricing range that at one end flatters the vendor and at the other is acceptable to fund managers. But given the fact that the company has turned its back on some cash-rich VCs, it must be confident of delivering this suggested valuation. The listing of Carluccio’s is another good piece of news for the UK eating out market. The 19% stake that founders Antonio and Priscilla Carluccio will sell in this process will net them £10m. As well as realising a significant payday themselves, the management team, led by Simon Kossoff, will get the opportunity to step out of the founders’ shadows and take Carluccio’s to the next level. Oh, and who will be the third bus in the IPO procession after Gondola and Carluccio’s? That will be Tragus, shortly after Christmas. PS. The 25 locations that Carluccio’s is targeting are: Bath, Bristol, Cambridge, Chelsea, Cheltenham, Chiswick, Covent Garden, Gloucester Road, Guildford, Kensington, Knightsbridge, Leamington Spa, Muswell Hill, Northcote Road, Paddington, Parsons Green, Primrose Hill, Richmond, Shepherds Market, South Bank, Spitalfields, Teddington, Watford, West Hamsptead, and Wimbledon.