Inside track by Mark Wingett Last October, my former colleague Mark Stretton penned a column called “Luminar: waiting for the tanker to turn”. Almost a year to the day since that article was written the tanker sank under the weight of a huge debt pile and a shrinking costumer base. Luminar Leisure, which at one point was worth over £800m and operated more than 300 nightclubs and late-night venues, was placed into administration last week with just 75 clubs, debts of £85m and a market capitalisation just north of £700,000. Shares that were trading at more than 600p in 2007 stood at 0.71p at the time of their suspension. Despite surprise that the collapse into administration didn’t happen sooner, this is still a significant event and demonstrates what happens when seismic structural changes in the market, meet regulatory changes and a recession that disproportionately impacts youth unemployment at the same time as a rise in student fees kicks in. At the same time, Luminar and the nightclub sector in general has been faced with too much debt, too many steamy leases, too many marginal sites, and too much capacity chasing too few customers. The last two years have been a tale of record losses (£123.1m for the year to 25 February 2010), debt issues, covenant waivers and extensions, all to a backdrop of attempts to stabilise sales. Last December, the group agreed a new three-year debt facility with its banks Barclays, Lloyds TSB and the Royal Bank of Scotland. However, in May it was forced to re-enter talks, as sales continued to decline, in order to secure a waiver on loan covenants. In August, came the announcement that it had agreed a further extension to its covenant waiver from its banks, giving it until 27 October to continue discussions about a longer term restructuring of debt. As we know it never made it that far with the banks’ patience finally coming to an end. The much-needed and talked about stabilisation in performance never materialised, same outlet sales for the 25 weeks to 20 August 2011 were down 11.7%. The decline in sales had slowed they were down 20.2% at the half year stage in 2010, but not nearly enough. Simon Douglas, the former head of music retailer Zavvi, replaced founder Steve Thomas as chief executive last February. He and his management team quickly realised that the group, which was already reeling from the double impact of the changes in the licensing laws and the smoking ban, was already behind smaller and more nimble competitors when it came to moving with and attracting a shrinking and more discerning consumer base. The impact of the licensing act shouldn’t be underplayed as it heralded an era of greater enforcement and zero tolerance for underage drinking, which meant that 10-20% of Luminar’s market got up and left it overnight. Pretty much everything in the name of diversity was tried by the new management team to right the ship: comedy nights, live music, dance music brand tie-ins and feeder clubs. Unfortunately, the customers had moved away from big-shed one room clubs – mega fit costs, mega fixed costs and unappealing when half full – into the arms of smaller, free entry rivals, step forward Yates and Revolution bars, and Saturday night reality TV - and weren’t inclined to come back. In some respects, Douglas and co never stood a chance when faced with rising youth unemployment and the plethora of other trends moving against the late-night sector. They are not the only company in the late night sector to have struggled since the downturn, and there will undoubtedly be more casualties. That there are only a handful of multi-site nightclub companies left in the sector tells it own story. The Sun hasn’t set yet The company had already received indicative bids regarding parts or all of its estate before it was placed into administration. It is thought that one such proposal would have seen Hugh Osmond, the entrepreneur who helped to create Pizza Express and Punch Taverns, take a significant stake in the business. Ernst & Young has been lined up to oversee the sales process and it is thought suitors will look to do some quick deals to get in and trading before the more lucrative Christmas period. It is understood that out of the 75 Luminar sites, between 30 and 40 are trading to a reasonable level. The chances of it staying as one business would improve if the banks were willing to take an appropriate haircut on the debt pile. The group reported Ebitda of £22.9m from the continuing business in its last full year, showing there is something to work with. Osmond’s investment vehicle Sun Capital, which is not to be confused with the US private equity firm of the same name, is now thought to be considering whether to bid for up to 50 of the company’s remaining sites, although this is again dependent on a significant amount of debt being written off. Sun Capital, the aforementioned US group specialising in distressed situations, which formed Atmosphere Bars & Clubs when it acquired the lion’s share of 3D Entertainment (3DE) in February 2010, was thought to be one of the indicative bidders and will surely take another look at the estate. It should face competition for small groups and individual sites from interested parties including R Capital, Matterhorn Capital and Novus Leisure. Notice the name missing in that list? Steve Thomas still casts a shadow over the company he founded, and with his new vehicle No Saints he has already been linked with a play for his former business. Not many people will know the assets more thoroughly – and he's bound to be tempted by some sort of return to his former stomping ground. Wet-led success While Luminar lurches from one problem to another, there was some positive news for the wet-led sector over the weekend, as cocktail bar chain Be At One, which has set itself apart from most of the industry by concentrating on selling drinks, rather than food, received private equity investment to continue its expansion in the capital and beyond. Funded by car loans and credit cards to get it started in 1998, the chain now turns over £10m a year. M&C Report understands that several private equity firms, including Risk Capital Partners, were interested in investing in the chain. They would have surely been impressed with a business driven by a strong and passionate management team, with dedicated and skilled staff, and in contrast to Luminar, a well-defined offer.