Inside Track by Mark Stretton
It’s clearly been an exceptional 10 months at Wagamama. Back in September 2004, having examined a possible IPO or sale, the business was refinanced to the tune of £63m by its owner Graphite Capital. Last week Graphite, which acquired its interest in 1996 when the fast-casual chain was at its embryonic stage, sold most if its stake to Lion Capital, another private equity firm that has stakes in Jimmy Choo shoes and Weetabix, in a deal valuing the group at £102.5m. That is some impressive value creation. Whatever Ian Neill and his colleagues at Wagamama have been doing over the past 10 months, it has worked. The management still own 10% and in all, Graphite has made 10.2 times its investment. Andy Gray, of Graphite, said: "Since we refinanced the business last year we have had lots of approaches. "We have also looked at the stock market but this gives us the opportunity to crystallise some of our investment while retaining an interest. This is now a much bigger and sturdier business and the deal gives us the opportunity to grow more aggressively, especially abroad." Part of the dramatic increase in the valuation of the business was attributed to more profit dropping through as more of the business’s expansion is funded from existing cashflow. The deal bodes well for a number of other restaurant companies that are in the midst of strategic reviews that will almost certainly result in a change of ownership. It seems that management teams approaching the end of investment cycles can be more selective in how they choose to fund the business going forward, whether its through the public markets, as was the case with La Tasca, or through private equity, as will surely be the case with Carluccios and Loch Fyne. The clamour will almost certainly prompt other businesses to test the market given the multiples currently attached to restaurant groups. But the current round of deals must surely be the precursor to some more fundamental consolidation yet to take place in the restaurant sector, such as that currently taking place among high street bar operators. As some of the dynamic eating out chains mature an obvious way of creating more value is to put some of these businesses together. There seems no reason why symbiotic businesses such as Wagamama and YO! Sushi should not come together. Other companies in the sector such The Restaurant Group are likely to make further acquisitions in the continued reinvigoration of its business. Legal & General Ventures have not acquired Tragus to stand still. It will look to add other brands to its portfolio of restaurants and has already approached Laurel Pub Company about acquiring its Santa Fe and Forno Vivo chains, although the current management has indicated more substantial deals may follow. There is also the Pizza Express-Ask conundrum. Analysts believe that owner TDR Capital is likely to get a lukewarm reception when it attempts to bring this business back to the public market, especially given that Nando’s, in which TDR has a 20% stake, is not thought to be part of the deal. Nando’s, in the eyes of the City, was the exciting bit and without it, TDR may struggle. Fund managers are a proud bunch and said to be less than enamoured that a business bought for about £500m has an initial valuation of between £700m and £800m. While a little wacky, a tie-up with Tragus or even a reverse into the Restaurant Group, may be the solution for TDR. What is certain is that whether it is in the New Establishment of restaurant concepts or the more mature corners of the market, we will see more deals that bring brands under one operation. In as competitive a market as this the most important element in value creation is the product you put in front of the customer, which Wagamama is clearly getting right. But almost as important is the constant search for greater efficiency. One way to deliver this is to exploit the synergies from partnerships, collaborations and outright mergers. The trick will be to realise these benefits while continuing to deliver on the plate.