Lion to feast on Wagamama?

The sale of Wagamama will be fascinating. This to my mind is the UK eating and drinking-out market holding up one of its finest businesses – a world class operation – for the international private equity community to fight over. Lion Capital reportedly believes it can do at deal at up to £260m, more than 12 times its annual underlying profits. If any business is worth that figure in these changed times, Wagamama is probably it. For my money, the sale process will say everything about the difference between the sector’s clutch of compelling scaleable concepts – and the rest. This is a business with the requisite core fundamentals, not to mention many sweet spots, in place. Here are a few of them: Highly profitable: ebitda conversion is up at about 19% and underlying profits grew 22% in its most recent year to £21m (at a time when the company had temporarily shut down new openings). It’s growing: like-for-likes are up at +2.4%, it has returned to meaningful site expansion and sales grew by close to 9% in the last full 12 months. Strong management: led by chief executive Steve Hill and chairman Ian Neill, it has strong leadership and culture. Genuine brand credentials: Wagamama is a strong brand. It has good brand identity (healthy, cool, urban, contemporary), it has good recognition and loyalty, it is very consistent. It has creditable extensions – cookbooks, Sweet Teriyaki Stir Fry Sauce etc. Innovative: from handheld ordering at the tableside to iPhone apps, it’s an early adopter. It’s prepared to try things, be it breakfast, online ordering or home delivery. Not to mention, new market. Property: it can take what other companies would consider to be secondary locations and make them work, whether it’s in a basement or up on a first floor. The queue: how many brands have queues out the door when other venues are empty? It may seem a little prosaic but it’s often an outstanding indicator – witness Jamie’s Italian. International: this is a genuinely international business. There are more, but you get the idea. It is the latter point about international markets that is perhaps most significant. The company now has over 100 locations, almost 70 of them in the UK, with a further 38 spread across 16 other countries. Although operated largely through franchise agreements, it has three restaurants in America, with a fourth under construction, operated directly by the UK management team. The company thinks it could end up doing as many as 20 locations in the Boston area alone. It plans to expand down the East Coast, and while it is still early days, if it can fortify its position in Boston, then crack other major metropolitan areas like New York and Washington, its American odyssey will be utterly transformational. In its initial research of the US market prior to launch, it was told a number of tweaks were required – the food was too spicy, Americans would not take to communal bench seating (booths were needed), they should think about installing televisions and so on. In the end, Wagamama took the UK format across the Atlantic in its naked form to find out for themselves what would work and what would not. The conclusion is that the concept has traveled well. A couple of tweaks were required, but nothing significant, and certainly not to the food. The group is now making money, and has hired local expertise in the form of Frank Peace as its new operations director. Peace knows a little bit about rollouts, having taken McDonald’s from 50 locations to over 300 in the New England area. Wagamama has also just appointed a US-based marketing manager to help connect the brand to key audiences. The challenge for Wagamama is to join the top table of American informal eating out, alongside the likes of Cheesecake Factory and PF Chang’s – and to replicate the snaking queues that it enjoys in many locations here in the UK. Like a number of other UK established businesses, such as Nando’s, Pret A Manger, Costa Coffee, Ping Pong and YO! Sushi, the Wagamama story is becoming an increasingly international one – an established member of the elite eating-out brands that as well as competing in the English Premiership can also go and play in the Champion’s League. Ultimately, America is the key component in this sales process – the opportunity could be huge. The deal is not yet done, and it remains to be seen if Lion’s price expectations will be meet. My money is on a positive outcome for what is an exceptional business. It is no coincidence that the two other businesses that have swapped private-equity hands since the world changed – Prêt A Manger and YO! Sushi – are also utterly differentiated, with a number of sweet spots. The loss-making Nando’s There’s been quite a bit of confusion and consternation since it emerged that Nando’s, the peri peri chicken restaurant chain, lost £23m in the 36 weeks to February 2009. As many will have twigged straight away, it transpires that the losses stem from the way the company is structured and its private equity ownership, with the figures including amortisation of £12m and interest payments of £19m. The accounts suggest that ebitda is in the region of £20m, on sales of £167m. Nando’s Chickenland Limited, thought to be the UK operating company – a subsidiary of the holding company – reported ebitda of £32m on sales of £230m in the full year to February 2009. The nature of ownership of these businesses often means that the accounts can be impenetrable – trying to use pre-tax profits as a proxy for the health of a business is misguided, and looking beyond ebitda is futile. It would be nice if the wider business press caught on.