The fast-casual and casual dining sector is fueling a revival of M&A activity in the sector, reports Mark Wingett. Ah to be a relatively young, successful eating-out business at the moment. You lucky thing because for you it could be about to get very interesting indeed. There is something in the air, the wheel is turning, we are about to see a proper return of M&A and investment activity, with youngish fast-casual and casual dining concepts at the forefront of investors thoughts. “In many ways the deals market feels just like 2007. A perfect market is caused by having both active sellers and buyers and that’s what we have right now,” says Mark Sheehan, managing director of specialist advisor Coffer Corporate Leisure. “There is undoubtedly a new round of M&A activity for younger growth businesses seeking equity,” says Paul Hemming, head of corporate finance at Zolfo Cooper. “There are great businesses out there with well defined propositions that are reaching a point where they need more capital to meet their roll out funding needs. The banks are not in this market so we are seeing a raft of equity fund raising. “On the M&A front, recent deals across the sector has shown that for the right asset in the right market 2007 pricing can be achieved, just look at Wagamama, Real Pubs and Geronimo. The other driver for M&A will be the restructured business of 2008 to 2010.” While London-based operators in the drinking-out market, such as Grand Union and Be At One, have already employed advisors to look at their private equity options, M&C Report understands that a numbers of up-and-coming concepts in the eating-out sphere are currently being courted by investors. Sites with three to 12 sites are now firmly under the microscope from private equity, venture capital funds and high net worth individuals. All are seeking those with solid fundamentals, a quality operation and scalability. “Values are not as low as they were, we are beyond the trough,” says Paul Campbell, head of Hill Capital, the advisory and investment fund focused on corporate strategy and investment in UK restaurant businesses. “The market is below the long-term average for sale valuations of 8x ebitda, but is at a level that investors feel comfortable with.” Campbell, who holds stakes in the highly thought of Hawksmoor and Tortilla businesses, says that the potential for growth remains key for investors and that those new groups with the potential to grow in the capital over the next few years, away from the harsh trading landscape in the regions, are in the boxseat. While those in the capital, as Campbell points out, will come under the most scrutiny, operators more exposed to the regional market but still producing growth and solid trading figures will not go unnoticed. Alex Reilley, managing director of the impressive Loungers business, recently revealed a “marked increase” in interest from private equity firms although he was quick to dismiss the prospect of an imminent deal. And with turnover for the group’s most recent year up 55% to £10.93m and unit ebitda up from £1.46m to £2.46m, plus a strong pipeline of new openings in place, it is not surprising to see why. And while the “young Turks” could be taking up much of the attention over the coming months, the more established groups, such as Gondola, Tragus and Pret a Manger, also face an interesting six to 12 months. While there will be private equity looking to enter or return to the sector, there will also undoubtedly be several looking at an overdue exit strategy, with both the Cinven-backed Gondola and the Bridgepoint-owned Pret taking interesting steps over the last few months, that could be interrupted as adding a bit of “sizzle” for prospective suitors and investors. In Pret’s case there is the current trial of its Coffee Pret Kitchen format, which it hopes will become the blueprint for less central and smaller high street locations, and its move into the continent with the opening of its first sites in Paris. A float at the start of next year still seems the safest bet. Gondola, the operator of Zizzi, Ask, and Pizza Express, has spent most of the last 18 months upgrading the majority of its estate but it still has an impressive roll out strategy, as highlighted by the fact that it is set to open 40 sites this year, a record for the group. It is also looking abroad to add a bit of “sizzle” with plans afoot for a proper launch of Pizza Express in India, while there are also whispers of a return to the US market for the pizza brand. However, Cinven’s real trump card when it seeks an exit could be the fast-growing and hugely popular burger concept, Byron. Pulling up trees in London, a successful launch outside the capital would certainly bring a few more suitors to the table. Which leaves the Blackstone-backed Tragus. Rumoured to be set to float in 2007, along with Wagamama, before the world fell off a cliff, the operator of Cafe Rouge, Bella Italia and Strada, has found itself somewhat overshadowed by the work that Gondola has carried out across its estate and the scene stealing performance of Cote. It will hope to gain further traction through its Cafe Rouge express format, while the launch of a new look mainstream Cafe Rouge later this year in Soho will be a significant step for the company. With Blackstone rumoured to gearing up for a flotation of its Hilton Hotels business and presently refinancing Center Parcs, Tragus could be its next investment to come under the spotlight. Hold on to your plates, because it’s about to get interesting.