Firstly, the industry was just coming to terms with the ramifications of the sale of 3,200 pub business Punch Taverns to Patron Capital in a £1.8bn deal in late August (with 1,900 sites sold on to Heineken for their tenanted Star Pubs & Bars estate), when Admiral Taverns owner Cerberus completed a disposal to Magners manufacturer C&C, backed by New York fund Proprium Capital for £220m in the first week of September. Remarkably, it appears that there is more still to come, with Revolution Bars the subject of an ongoing bidding war between Slug and Lettuce operator Stonegate and the UK’s biggest nightclub operator Deltic (formerly Luminar).
The UK Licensed Sector
The UK licensed sector is incredibly diverse, containing some 49,000 pubs and 27,500 restaurants, as well as many other outlets that fall into other categories. Despite this volume and diversity, the market remains relatively unconsolidated, with only 9 restaurant groups numbering over 200 sites, compared to some 24 pub companies. This has undoubtedly created a landscape in which smaller brands and new entrants can quickly establish themselves and thrive, particular on the restaurant side. Meanwhile, the predominantly freehold nature of the majority of pub portfolios provides good security by underpinning any investment. The attractiveness of this growth potential is perhaps best illustrated by the level of investment coming into the sector from private equity. 15 of the 74 pub companies with 20 or more sites are backed by private equity investors, and 32 of the top 81 restaurant companies.
Yet there are challenges in realising investment values in the restaurant market, which is 90% leasehold, typically due to the much lower multiples these businesses tend to transact for. Additionally, as the London rental market peaked, and pressure for space in “Northern powerhouse” cities such as Manchester and Leeds drove up competition for single sites, restaurateurs were increasingly looking towards regional cities and market towns to satisfy their growth ambitions. These provincial UK restaurants are influenced by national rather than global economic factors, and restaurant performance had been progressively bouncing back since the post-recessionary low point, with many indicators pointing to sustained growth in years to come. The best example of getting this right, is perhaps Loungers, acquired by Lion Capital in December 2016 for £137m for its then 94 sites, rumoured to represent a 16x multiple (for a predominantly leasehold estate).
Casual Dining – Still Flavour of the Month?
Casual dining was once touted as the fastest growing sector of the UK restaurant market, with sub-sectors growing at up to 7-8% a year. However, the past 24 months have seen mixed results, and some of the largest players, including The Restaurant Group, Casual Dining Group and Pizza Express have each posted negative like-for-like sales. In reality, the challenge of increased competition from new site openings (historically the main source of growth within the sector) and private equity-funded rollouts, as well as pubs hungry for their share of the pie, have squeezed the top line. A number of established brands are now trying to replicate the successes of their more agile competitors as they realise that customers are increasingly fatigued by the same identikit brands, and want to experience something genuinely different. The others are either slowing the pace of acquisitions or disbanding acquisition teams altogether, leaving the door open for more original operators at better rents.
So Where is the Money Going?
PE investment has followed the above trends, moving from an acquisition frenzy of big deals to more cautiously cherry picking the opportunistic growth plays. In 2015 and 2016 we saw companies such as Côte, Azzuri, Gourmet Burger Kitchen, Le Bistro Pierre and Giggling Squid change hands, as the hunger for casual dining businesses seemed unstoppable. However, by the end of 2016, the need to back the right horse had become all too apparent, with the decimation of Ed’s Easy Diner in a pre-pack sale of barely half of its units to Boparan (making the tally six major casual dining transactions over the two-year period).
Not a single casual dining business of scale has changed hands in 2017, with the money instead chasing the four-site Flat Iron brand, acquired by Samworth Brothers; quick-service chain Leon, acquired by Spice Private Equity; café brand West Cornwall Pasty Company, acquired by Piper Private Equity, and Filmore & Union acquired by the Business Growth Fund. Meanwhile, investment in pubs was relatively quiet in the first half of 2017, since TDR Capital backed Stonegate Pub Company acquired Walkabout-operator Intertain in December 2016. However, things really heated up in August 2017 with Patron Capital Partners and Heineken’s acquisition of 3,200 site Punch Taverns, followed shortly by Admiral Taverns’ disposal to C&C and Proprium Capital by Cerberus, and an ongoing bidding war between Stonegate and nightclub operator Deltic for Revolution Bars.
The much-lauded flood of Asian money has been notably absent from major deals in the sector since Beijing-based Hony Capital’s acquisition of Pizza Express in 2014. Difficulties in extracting money from China aside, the heavily fragmented restaurant market in particular is deterring inward investment, as few businesses are of a sufficient scale to be of serious interest, which limits the ability to roll out any acquired brands back in Asia. Opportunistic investment is still taking place albeit on a much smaller scale, such as with Chinese government-backed SinoFortone Investment’s acquisition of the Plough at Cadsden, brokered by Christie & Co in late 2016, which had become a hotspot for Chinese tourists since President Xi’s state visit in 2015.
And What Next?
Any investment involves a willingness to take on risk, and without appropriate due diligence it is all too easy to get it wrong. For this reason, we expect investment to continue to follow a more cautious approach, carefully determining which companies stand the best chance of making the required returns, as opposed to the flurry of activity seen in previous years. However, further scale acquisitions aren’t necessarily off the menu yet. Remember, it was only a year ago that we were talking about both Cinven and TA Associates Management LP eyeing up The Restaurant Group plc, on the back of a crash in its share price from a peak of over £7.30 to just over £2.50 a share; and the current price of circa £3 could mean that an acquisition play remains an appetising option. Equally, Apollo-backed Casual Dining Group could soon find itself on the menu if its investments in La Tasca and Las Iguanas, and Bella Italia rebrand don’t deliver. On the pub side, with the major players now focused on managed operations, eyes are being turned towards tenanted opportunities. Even with the completion of the Admiral Taverns and Punch Taverns transactions, there could still be room for a new entrant to buy their way in to the sector, building a sizeable tenanted estate for a limited capital outlay, if an investor can see a long term value play there.