Inside Track by Peter Martin
Let's get the New Year predictions in early. Restaurant chains will be a major driver of deal activity throughout 2007. With the flurry of activity in the run up to Christmas, that looks a pretty safe bet. On Friday, Blackstone, the US private equity house, snapped up Tragus for £267m, while this Sunday's papers are full of more deal stories, ranging from a £35m refinancing at YO! Sushi, the sale of TGI Fridays by Whitbread for a suggested £70m, a £48m bid for Town Centre Restaurant, owner of Café Giardino, and a rescue plan for the struggling Little Chef. The appointment of former Urbium boss Jon Conlan as the new chairman at Paramount Restaurants has also stoked speculation of more activity from that quarter, building on the Chez Gerard group's purchase of the Caffe Uno chain. A couple of weeks ago, I carried out a straw poll of a dozen leading investors, both in the private and public markets. Just over half of them predicted an increase in both investment and mergers and acquisition activity in the pub and restaurant sector in the coming year. Only three thought the number of deals would decline. Most interestingly, when asked which areas would attract most interest, casual dining chains came out clearly on top. Next came “health and environmentally-friendly” concepts, followed by Gastro pubs and pub restaurants. Tenanted pubs, which have driven so much of the big deals in recent times, came in fourth equal alongside sandwich and coffee chains. With eating-out still on the up and doubts over the pub sector in the run up to the smoking ban, those look sensible priorities. The big question, however, is whether all this excitement will lead to any meaningful consolidation in the restaurant sector? It has been talked about for long enough, with many in the both the investment and operating sides of the business advocating the logic. But we are still waiting for the emergence of any really dominant groups looking to buy market share. The one exception, if you see pub restaurants as part of casual dining, is Mitchells & Butlers. The Whitbread sites acquisition has firmly positioned its restaurant division as the UK's leading casual dining player and has only widened the gap between it and its rivals. That should increase the imperative for others to grow. Gondola has shown little appetite since the original deal that put Pizza Express and ASK together. The Restaurant Group has stabilised and pruned. Both should be well placed to acquire new brands, but appear in no rush. Steady organic growth has characterised both their approaches of late. That puts the focus back on Tragus, flush, it is reported, with £100m to fund expansion. However, my guess is that the most attractive deals will remain those that focus on the opportunities to take the large number of essentially single-concept groups in the sector further down their routes to market maturity. It's been the story with the likes of Wagamama, Carluccio's and most recently Caffe Nero - and almost certainly a few more in 2007.