Inside track by Mark Wingett
Over two months into a new year and it seems that some of the key trends that 2012 will be remembered for have already come into focus - movement from the banks on assets, whether that is through refinancing or placing companies on the market; private equity starting to make their entries or exits; and increasing costs placing further pressure on margins.
Firstly, movement from the banks. Orchid has just completed a refinancing exercise, while rival pub operator Barracuda is thought to be exploring a similar route after would-be buyers were put off by its current debt level. Tragus, the operator of Cafe Rouge, Strada and Bella Italia, could be next.
Walking into the new format Cafe Rouge in London’s Villiers Street last Friday, I couldn’t help but think that the drilling taking place on the pavement outside wouldn’t exactly be helping trade. The same thought occurred as I then walked past the one opposite Leicester Square, which although open was covered in scaffolding.
However, I didn’t then expect to read, while having my cornflakes yesterday, that the chain’s parent company, Tragus, was set for “crisis talks” with its banks in an attempt to avert a breach of its covenants at the end of May.
Let’s get this straight, crisis is an extremely strong word, especially as the same report went on to highlight that the c.295-strong group is thought to have no immediate liquidity problems and £40m in cash on its balance sheet.
What it does highlight is that for the likes of Tragus, Gondola and The Restaurant Group (TRG), those with nationwide exposure, trading remains extremely challenging. It should also push a refinancing of the Blackstone-backed Tragus further up the agenda.
Last October, TRG, owner of the Frankie and Benny’s and Chiquito brands, completed a refinancing exercise that gave the business a new five-year, £140m bank facility. Two months before that Gondola, the owner of the Pizza Express, Zizzi and ASK chains, completed the refinancing of £520m of its senior debt.
The talks between Tragus and its banks are due to start tomorrow, with reports suggesting that the restaurant operator will be given more headroom on its £230m of debt in exchange for a fee of around £10m and higher future interest payment. It is not a leap to deduce that surely they will also include the first conversations on a full refinancing of the business, which if successful should underpin its expansion and refurbishment plans for 2012 and beyond.
On the M&A side of things, TCG, Inventive Leisure and Novus have all been placed into play since the turn of the year, all to varying degrees at the behest of the their lenders. The deal momentum experienced in 2011 has carried forward into this year. No longer can the banks be accused of inertia.
Which is not a criticism that can ever be levelled at the private equity sector. At the end of last year, Quilvest took a stake in Tortilla, and Isis is set to follow with its pursuit of the six-strong Pho chain coming into the final few laps. Living Ventures is also reportedly looking for private equity backing as it explores options for ending its joint venture with TRG. All three groups have grown during the downturn, with Living Ventures especially continuing to buck the regional trend. Others will surely follow.
Unfortunately, a cloud on the horizon while all this deal activity is taking place and something that could impact trading and therefore price expectations is rising costs. A problem that was flagged up over the last 18 months is now come firmly into focus as petrol prices reach a record high and a number of fixed supply contracts are due for renewal.
Last week, Andrew Page said that cost inflation in 2011 proved to be a “somewhat more significant issue than anticipated”, particularly on food and beverage costs where the group saw average increases for the year of over 3%.
Page said that the outlook for 2012 in terms of cost inflation was uncertain at this stage. He said: “We think it unlikely that food and beverage cost inflation will be any less than that experienced in 2011. Although our strategy continues to be one of fixing costs where sensible, at present a larger proportion of our food and beverage input costs remain unfixed than would normally be the case. This is in anticipation of further softening in commodity prices during 2012.”
It will be interesting to see how many follow TRG’s lead and give themselves some room for manoeuvre.
Tanjoubi omedetou YO!
Hopefully the above subhead hasn’t offended anyone. It should say happy birthday YO! in Japanese (honest) in tribute to the conveyor belt chain’s 15th birthday, which it celebrated last week at its original site in London’s Soho.
And what’s not to celebrate for one of the UK eating-out market’s finest businesses, that is on the verge of being a truly international group?
This month the Robin Rowland-led, Quilvest-backed chain will open its 60th restaurant in the UK, in Plymouth. Further sites will follow in the UK, but as with Wagamama before it, it is in the overseas market that YO! is set to take the next step from Premier League to Champions League.
The chain opened its first site in Norway at Oslo airport under an agreement with SSP last month. For YO!, which already operates franchise sites in Ireland, Portugal and the Middle East, the link up with SSP could see the chain enter a number of new overseas territories further strengthening its international presence.
Then there is the US. Last year, it signed a deal with the Sushi Company of North America to open 10 outlets, located between Washington DC and Philadelphia, in the US. The first of which will open in Washington in May. The group anticipates 12 locations being open and operating in the US by the end of 2013.
This is a highly profitable business, underlying profits rose 19% to £8.1m in its last annual accounts, which is growing, has a strong management team, and continues to innovate.
Many happy returns.
