Inside Track by Mark Stretton
So there we are: all hail the return of the deal market. The fun is about reignite, starting with La Tasca, a transaction for which will shortly be concluded with either Tragus or James Horler or Paul Symonds paying £100m for the privilege. Well actually, perhaps not. Much excitement ensued last week after it emerged that Bay, the casual dining group that runs La Tasca, was effectively in play after two unsolicited approaches for the tapas chain had prompted the appointment of McQueen to explore these offers and to flush out other interested parties. However clearly a deal for the La Tasca business, which is apparently going backwards in profit terms and in the hands of Icelandic civil servants due to Kaupthing’s nationalisation, is far from straightforward. It is certainly not an obvious candidate to signal a return to the eating and drinking-out market of private equity, debt financing and deals. A transaction hinges on a number of factors – the most obvious of these is whether the valuation gap between what Bay’s friends in Iceland think the business is worth, and what would-be buyers are prepared to pay, can be closed. The £100m figure being touted around initially last week, albeit for the entire Bay business, seemed fanciful. If La Tasca goes for £70m I would be amazed. When it was bought by Robert Tchenguz three years ago it was producing more than £14m ebitda at unit level (excluding head office and the central kitchen). The current number, which will be revealed in the McQueen information memorandum, is thought to be significantly less, although it is the trajectory of that ebitda number that will exercise the minds of buyers the most. If a price can be agreed, the equivalent perhaps of getting to base camp, there is still a proverbial mountain to climb in the issue of funding a deal with some debt, and securing the level of capital required to invest and reposition this business. If a price can be agreed, the two groups will almost certainly need to get creative about the construction of a deal. Ultimately, this process brings to life the sharp reality of restaurant group values in 2010 versus the dizzy days of buyout bonanzas in 2006 and 2007, albeit with a little sense of distress given the declining profit numbers (this is no Wagamama). Nevertheless, whether a deal is done or not, bar and restaurant operators will get a sense of where the market has moved to. The appointment of McQueen to lead a formal process precipitated a restructuring of Bay, with Slug & Lettuce moving across to sister group Town & City Pub Company to join brands such as Yates. When Bay was formed, leasehold restaurant business were exchanging hands for in excess of 10 times annual underlying profits, while leasehold bar businesses were only being valued at about five times profits. In a bid to close the arbitrage, Tchenguiz decreed that Slug was a restaurant. However, despite the attraction in labelling Slug a restaurant, they have now worked out it is a bar. This move is also pragmatic. It makes a deal more attractive for the remainder of Bay, and there is actually more investment cash available at Town & City, given its smaller debt requirements so the repositioning and updating work at Slug can be completed at a faster pace. The positioning of Symonds’ departure from Bay smacked of spin. In a textbook MBO, if the chief executive is leading the action he should step down, but this doesn’t often happen and if it does, it’s normally about three seconds before an agreed offer is slapped on the table. Symonds probably wasn’t thrilled about the prospect of losing a significant part of Bay’s profits in Slug and, at the same time, his salary probably looked a little chunky for a business that was about to almost halve (according to companies house Bay’s highest paid director received £370,000). A handshake and a parting of the ways probably suited both groups. That is not to say that he isn’t trying to buy the business, he patently is. With Suzanne Baker stepping up to CEO of Bay and Toby Smith running Town & City, the groups do have two very highly regarded people at the helm. Whether the best efforts of Symonds, ex-La Tasca boss James Horler, not to mention Tragus, means that Baker’s tenure will be short-lived, remains to be seen. IRC to leave the stock market? While a deal for La Tasca is very far from straightforward, could a buyout be on the cards for Individual Restaurant Company (IRC), the operator of Piccolino and Restaurant Bar & Grill? Last week Malcolm Walker, the Iceland CEO, doubled his stake in the business to almost 20%. Walker is not talking so we can only speculate on his motives. But together with IRC’s chief executive, Steven Walker (no relation), who owns about 15%, and Paul Dawes, the North West businessman who made significant profits as a shareholder when Inventive Leisure went private, who holds about 10%, they speak for 45% of the shares. Add this to other directors, friends and families, and there is over 50% of the Aim-listed company in the hands of very few people. There is nothing overt to suggest that the two Walkers, Dawes et al are in cahoots, but we have seen this before and it just feels like some activity is around the corner. IRC’s equity is peanuts and there is no volume of trade in the shares, so public ownership does not necessarily stack up.