Inside Track by Mark Stretton
Carluccio’s, Clapham House, Ha Ha Bar & Grill, Stonegate, TGI Friday’s – there has been some encouraging moves on the M&A front in recent times. Added to which deals involving EAT and Geronimo Inns are said to be progressing. However, if the wheels didn’t exactly fall off the sector’s resurgent deals wagon last week, there was something of ‘a flat’ when news broke that the sale of Wagamama had been put on ice after the £200m put up by auction frontrunner Morgan Stanley failed to pass muster with current owners Lion Capital. It was an offer well short of the £260m price tag that was mooted when news of an auction first emerged in August. What is clear is that Lion want out, but are not prepared to accept less than what they believe Wagamama is worth. In the current market, they could be accused of being greedy, but if they are prepared to wait they will almost certainly achieve a better price for what is one of the restaurant market’s stand-out brands. What is also clear is that the prospective buyers in this process, which alongside Morgan Stanley were also said to include InvestCorp and India Hospitality Corporation, did not fully buy into Wagamama’s American dream. With three restaurants currently open and a fourth in development, Wagamama probably did not have the necessary exposure to the US to persuade buyers to buy it. With another six open (and working) it would have been a very different story and perhaps the management team will now press ahead with proving the investment case on the other side of the Atlantic. Indeed Steve Hill, CEO, is believed to be flying out to Boston this week to look at sites and liaise with the US-based team. With Nando’s and Ping Pong among others reportedly gaining good traction with customers in Washington, there is clearly room in the States for the UK’s best fast-casual concepts. But Wagamama has not been an overnight success – Hill and his executive team have had to tweak various bits of the concept (such as seating and menu) for the American market, although he now feels its flagship at Boston’s Prudential Center is bang on for the market. But essentially, the bidders for Wagamama ignored its American odyssey and valued the business on historic ebitda – £21m at the last count (and thought to be heading for £24m this year) – not sure whether to value the American foray as an opportunity, or liability. What must have also played its part in this process is debt. Banking and debt remains difficult, and that naturally impacts what potential bidders can put up. Private equity groups involved in some recent transactions have taken a view on this: the purchase of 333 pubs from Mitchells & Butlers by TDR Capital to form Stonegate Pub Company was apparently funded entirely by cash (TDR will simply fix it at a later date). However, latest thinking suggests that for a stand-out business like Wagamama, with a strong brand and reasonable scale, four times ebitda is achievable in debt, which in Wagamama’s case means between £85m and £96m (at the moment Lion has about £90m of senior debt against the business). This means that while bidders for Wagamama were prepared to more than match the debt with a cheque north of £100m, they couldn’t stretch to what Lion wanted. Paul Hemming, head of corporate finance at Zolfo Cooper, says: “While the market remains difficult, it is possible for a stand-out business worth more than £150m to attract debt in the region of three to four times ebitda for leasehold assets and more perhaps if it was a pub group with freeholds. “For a business below £150m, two to three times is more likely but the smaller the business the more difficult it is to get debt. “At the other end of the scale a big sector company like a Wetherspoon or a Fuller’s could probably expect to be able to get to between four and five times EBITDA, although they are all currently taking a more conservative approach and keeping debt below those sort of levels.” While there is disappointment in the market that one of its leading operators has not been able to defy the current backdrop to achieve a knock-out price – and set a valuation benchmark – the fact remains that the Wagamama business is essentially still up for sale. If someone comes up with the right price it will be sold. It is a fascinating time for corporate activity. Some suggest that private equity are swarming over the market. They are trying to be counter-cyclical – in the same vein as TDR – and attempting to take advantage of what is almost certainly a low-water mark in the valuation cycle. The fact remains though that while there may be wiling sellers and willing buyers, doing the deal is not easy.