Inside Track by Mark Stretton

It’s been a good week for the eating out sector.

The success of La Tasca’s transfer from private to public ownership means that an IPO is perhaps once again a real and possible exit route for other restaurant businesses.

It may not be long before other companies take more than a sideways glance at the public markets. Carluccio’s, Loch Fyne and Yo Sushi are obvious candidates. It may be a bit soon to mention Wagamama given its recent £63m refinancing but the noodle chain is definitely another to watch.

There is also talk that Urban Dining’s proposed acquisition of Ma Potters is off, which may lead the chain to seek a listing of its own (either way there is a big question mark over its future ownership).

One of the most obvious food-led businesses in the market for a flotation is the Pizza Express / Ask / Zizzi business, which is 80% owned by TDR Capital and 20% owned by Capricorn, the majority shareholder in Nando’s.

The pizza and pasta group is apparently heading for Ebitda of £80m, which has lead its owners to attach a nominal price tag of up to £800m, given a handsome 10x multiple. More independent analysis would probably led to a valuation of somewhere between £650m and £700m, but this is still significantly more than TDR’s investment.

It will be interesting to see if the public markets have the appetite to buy back a business that was so obviously taken private on the cheap (it was bought for an historic Ebitda multiple of 5.4x).

But the enthusiasm for the La Tasca IPO among investors shows there is real appetite for competent management teams running businesses built on the foundations of a scalable brand. Advisers of La Tasca say the share register reads like a Who’s Who of blue-chip institutions.

But clearly this does not mean the door to the public markets has swung open for everyone and it is worth noting the reasons why this has worked.

Firstly, the timing is exceptional. From the middle of last year it became obvious that drinks growth in the on-trade was stalling while food growth, driven by the consumer’s increasing desire for eating out, ploughed ahead. This was most recently demonstrated by Mitchells & Butlers’ latest trading statement, when like-for-like sales figures revealed drink growth of +2% versus food growth of +10%.

Yet the choice for institutional investors who want to back food-led businesses in this market is severely limited, especially given the number of different options available just a few years ago, such as Ask, Fish!, Gaucho Grill, Pizza Express. Now it almost begins and ends with The Restaurant Group. This is also of course Prezzo and foodservice has more - Caffe Nero, Domino’s, Greggs - but the choice is still limited.

Secondly, La Tasca has plenty of growth in the tank. At 45 UK sites there is much to go for. It is also developing a second, slightly more sophisticated concept in La Vina, a bit like ASK, with Zizzi. There are currently two La Vina’s, in Hale and Liverpool.

It also has two sites on the east coast of the US - one in a neighbourhood area, in Arlington, Virginia, the other in a downtown convention area in Washington. A third will follow in Baltimore, in a harbour-side location, which again is a different, more entertainment-driven location from the other two, and will sit among a clutch of other eating out chains.

Interestingly, two of the three La Tasca sites are next door to Cheesecake Factory, a phenomenally impressive US chain that averages annual sales of about $10m per unit.
However, La Tasca’s expansion in to the US is not about taking on Cheesecake or the world. It is about creating a differentiated and desirable brand for franchisees, and so far the project has been funded out of cash flow and is profitable.

Thirdly, it has good people. This is not just about the management, which has a well-documented track record, but also the people running the sites, who can earn an annual salary of £70,000 against an average in the fast casual market of between £30,000 and £40,000.

To do this you have to become a managing partner on a low base salary - the rest comes from a monthly share of the profits. The result is a queue of people who want to run a La Tasca. It also means the interests of the people running the sites are directly aligned with shareholders, a strong selling point.

Investors also like the wider picture.

The restaurant meals segment of the eating out market is forecast to grow by 25.7% from £3.5bn in 2003 to £4.4bn in 2007 (source: Mintel: Eating Out Habits UK, April 2004).

Women are the key target customer at La Tasca. The number of women in full time employment is growing at twice the rate of men and they are also marrying and having children later in life. Countless consumer research shows that women - not men - are the key decision makers among couples and families when it comes to picking the restaurant.

The business is also not exposed to some of the more sensitive social issues such as problem drinking.

The eating-out sector is hot. That means there is a raft of private equity groups ready to back management teams.

But for Penta Capital a float made more sense. It wanted to realise some of its investment but retain a significant stake in the business.

When Wagamama refinanced in the summer for an implied value of £62.7m it represented an historic Ebitda multiple of 10.3x (or nearly £2.9m a restaurant), a new benchmark for valuations in this sector.

The La Tasca float puts the business on a post tax profit multiple of 13.5x. It is another piece of good news for individuals who run - and have equity stakes in - restaurant or eating out chains.