Come dine with usBars, restaurants and casual dining update

Casual dining is boomingThe UK foodservice sector1 grew by 2.9% in 2014 to reach a value of £46.6 billion (according to data from Horizons), and is forecast to continue to grow in 2015, as the economy recovers and consumers gain in confidence and increase their spending on eating out. The sector is forecast to grow by £10 billion to reach a value of £56.3 billion by 2019.

Within this, the UK branded restaurant market reached a value of circa £17.6 billion in 2014, an increase of 6% from its £16.4 billion valuation in 2013, according to data from M&C Allegra. The branded restaurant market is forecast to grow by £5.6 billion over the next five years, with branded players continuing to take market share from independents.

The casual dining sector grew strongly in 2014 and is expected to continue to outgrow all other channels. With customer visits currently up 18.1% compared with 2008 levels, this expansion is in part due to the increase in the number of outlets, but also the success of casual dining chains at meeting consumers’ needs. The key drivers of this growth trend include clear branded offerings, flexible menus, innovative dishes, extended opening hours and value-for-money food.

Steady pace of M&A in first half of 2015After a bumper level of investment in both volume and value terms in 2014, the pace of M&A activity in the bars, restaurants and casual dining sector so far in 2015 has been lower. According to analysis by Grant Thornton, there were 30 transactions in the first six months of the year compared with 73 deals for the whole of 2014.

The most marked change is in total disclosed value, which reached a total of just £120.7 million in the first half of 2015, compared with £3.6 billion for the whole of 2014. However, last year’s exceptionally high total value was skewed by a small number of very large transactions, with the ten largest deals in 2014 accounting for £3.3 billion of the total (92%). These were dominated by Hony Capital’s £900 million purchase of PizzaExpress and Greene King’s £759 million acquisition of Spirit Pub Company. Other deals of significant size included the £304 million sale of Prezzo to TPG Capital, the £225 million sale of TGI Friday’s Inc.’s UK arm to Electra Private Equity and the £250 million sale of ASK and Zizzi, now renamed Azzurri Group, to Bridgepoint.

Excluding these mega-deals, average disclosed deal value was £60.4 million in 2014, compared with £31.5 million in 2013, and a mere £9.3 million so far this year.

1Foodservice covers restaurants, QSR, pubs, hotels, leisure, staff catering, health care, education and services

Welcome to the latest edition of ‘Come dine with us’, which analyses investment trends and deal activity in the bars, restaurants and casual dining sector. The volume of transaction activity in the first half of 2015 has been steady, after considerable pent-up demand was satisfied last year. However, looking at the recent pick up in activity as well as the healthy deal pipeline, we expect transaction volumes to increase in the second half of the year. Continuing high levels of interest from private equity is driving M&A and providing support for sector valuation multiples. In this edition we also focus on the latest developments in crowd funding, mini-bond financing and payment technology, as well as analysing the impact of new EU allergen information regulations.

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The hunt for high quality assets drives earlier stage investmentWith the big-ticket transactions of TGI Friday, Prezzo and ASK/Zizzi at one end of the deal size spectrum, at the other there is continuing significant interest and activity in small, but fast-growing opportunities. The small to mid-tier private equity players, who have a particularly keen focus on the fast casual segment of the market, are leading demand in this area. Given that most private equity groups typically seek to acquire established players with a strong growth pipeline, a minimum of three sites, good trading margins and a business model that can be rolled out, there is a scarcity of suitable targets which do not already have private equity investment. The competition, therefore, for assets amongst the small and lower mid-market is intense.

Between these two ends of the spectrum, there has been a void of transactions in the mid-tier of the market as competition for high quality assets pushes private equity investors to look at earlier concepts. Groups which would normally look for investment in the £20 million to £50 million range, are looking

at smaller opportunities earlier on in their life cycle. It will take time for this situation to resolve itself as the current crop of early stage opportunities mature and grow into tomorrow’s mid-market players.

For example, in May 2015, Palatine Private Equity supported the MBO of cocktail and restaurant chain, The Alchemist Restaurant & Bar, in a deal valued at £13 million. Other recent private equity investments at the smaller end of the scale include Piper’s investment in Hickory’s Smokehouse and Active Private Equity’s acquisition of a stake in gourmet burger chain Honest Burgers. Active Private Equity, which also owns a stake in healthy fast food restaurant group Leon, reportedly invested £7 million for 50% of the business in January 2015.

In a sector dominated by private equity investors, and with few sizeable trade groups undertaking consolidation plays, AIM-listed restaurant group Fulham Shore is notable for seeking to build a portfolio of restaurant brands. Fulham Shore followed last September’s acquisition of the Real Greek chain with the purchase of sourdough pizza specialist Franco Manca in March for

£27.5 million, and has recently said it is seeking to add a third leg to its offering.

Second half off to a flying startOur expectation that M&A activity will pick up in the latter half of the year has been borne out by a flurry of deals in July, all involving private equity:

• CBPE Capital sold French-themed restaurant chain Côte to BC Partners, achieving a 2.9x return on its investment and a 78% IRR for approximately £250 million.

• Casual Dining Group, backed by Apollo Global Management, won the auction to acquire South American themed chain Las Iguanas, reportedly beating competition from five other private equity groups. The deal was estimated to be valued at £85 million, and provided Bowmark Capital with a 3.7x return on its original investment.

• Bridgepoint acquired ASK/Zizzi in December 2014 and created Azzurri. In July 2015, Bridgepoint used the Italian casual dining vehicle to acquire London-based Italian quick service chain Coco di Mama.

Whilst 2015 is unlikely to match the exceptional total deal value of 2014, the deal pipeline looks healthy with a number of assets reportedly with sales processes underway or in the pipeline, including La Tasca, YO! Sushi, Gaucho Grill, Bill’s, Giggling Squid, Ed’s Easy Diner and a number of Gordon Ramsay restaurants.

Competition for assets is underpinning robust multiplesThe intense competition for the limited supply of attractive and scalable assets is supporting valuation multiples. M&A trailing EBITDA multiples are typically in the range of 7.5x to 12.5x, with an average of circa 9.5x. Recent multiples reportedly paid range from ASK/Zizzi at 7.5x through to Pizza Express at 9.5x and Côte at 15x. The most directly comparable quoted group in the sector, The Restaurant Group,

currently operates on a 12.5x EV/EBITDA multiple. Reported deal/earnings multiples only tell half the story however, with high growth concepts the difference between a trailing EBITDA multiple and a run rate multiple can be profound. The challenge for vendors and their advisors is to position a concept in such a way that double digit multiples attach to the forward run rate; not the trailing figure!

Appetite for alternative finance Crowdfunding has been highly successful in the hospitality sector, with notable investments including River Cottage, Mexican fast food chain Chilango, coffee shop chain Taylor Street Baristas and London-based pizza-by-the-square-slice concept Pizza Rossa.

According to analysis by non-profit organisation Nesta and The University of Cambridge, equity-based crowdfunding reached £84 million in 2014, up 201% year on year.

Leading crowd funding website Crowdcube, for example, has raised a cumulative total of more than £90 million since it launched in 2011. It has funded more than 270 businesses to date, and is targeting to fund more than 200 businesses in 2015. Crowdcube has previously stated that businesses in the food and drink space account for a third of investments.

Successful crowdfunding investments reflect the current investment trends in the bars, restaurants and casual dining sector, and many recent opportunities have exceeded their investment targets. These include healthy food chain Filmore & Union, all day dining espresso/cocktail bar Grind, and Brew, a pub concept dedicated to selling tea.

The crowdfunding concept - raising money from individual investors and customers - is also being used in mini-bond financing and Grant Thornton has been active in this space. Mini-bonds are an increasingly popular form of finance

for companies with brand loyalty or a ‘following’ from their fans, customers or others and provide a means to raise funds in a flexible way whilst increasing brand awareness.

New technology is transforming the customer experienceWhether London-based or a branded offering, it is vital for all players to have a clear offering and explore ways they can differentiate as well as create and harness customer loyalty. A key emerging trend is the increasing use of automation and technology in the casual dining and broader hospitality sector as a tool to improve customer engagement.

There is a growing demand from customers wanting to pay via mobile phone and restaurants are partnering with app providers and payment companies to meet this requirement. Examples include Thai group Busaba Eathai, which has teamed up with loyalty platform provider MyCheck to develop a loyalty and payment application. MyCheck’s technology allows customers to check-in, pay securely through a wide range of payment options including PayPal, split the bill, tip waiters and waitresses and leave without waiting for the bill – all from their smart device.

Restaurants are also using technology to automate and improve reservations and ordering processes, while other apps can be used to improve footfall. In London, for example, the CityHawk app uses location data to tell customers which nearby restaurants have tables free. The technology trend is evolving rapidly and clearly has further to run as more restaurants exploit the potential of smart mobile devices.

L king forward “The sector, perhaps more than ever before, continues to evolve through a combination of new entrants, innovation and investment in proven models. On top of this, a supportive macro-economic environment and benign political climate are creating perfect investment conditions. These current market conditions are giving rise to a number of cash out / devcap deals where founders are taking advantage of strong pricing to sell down a minority stake whilst at the same time raising development capital to accelerate roll out plans. I anticipate the second half of 2015 being a busy period for operators, advisors and investors alike.”Will Baxter, Head of bars, restaurants and casual dining

Developments in food labelling and allergen information: opportunity for complianceThe introduction of the much-criticised EU Regulation 116/2011, which includes a mandate to communicate allergen information to consumers, has been received with confusion and cynicism. At first glance there may appear to be little perceived business benefit to compensate for the effort involved in complying, but business owners, managers and chefs should reflect on the opportunity these regulations could provide.

The essence of the directive is to improve transparency through clearer labelling statements covering the content, processing and storage of both pre-packed and non pre-packed food items. The most significant mandatory element affecting the food service sector is the listing of food allergens, of which 14 have been

deemed to be the most common across EU states. Food establishments, or their staff members, will no longer be able to state that they do not know if an allergen is present in a particular dish/menu, or issue a blanket disclaimer that all foods “could” contain allergens.

Reputational damage is an obvious risk. “All it takes is one incorrect piece of allergen related information to slip through the net causing one customer to have a serious or fatal event, to destroy the reputation and potentially business of an operator,” says Yinka Makinde, founder and CEO of Eatjoy, a cloud-based service helping food outlets comply with new and emerging EU legislation, turning it into a business growth opportunity.

The new regulation, however, reflects broader trends. Consumers are becoming more conscious about what they eat and the demand for greater transparency will increase rather than recede. The trend in legislation is starting with allergens, but is likely to progress to nutrition and provenance, particularly in the wake of food scares, such as the horsemeat scandal.

“Why not leverage new EU regulations to make the most of this growing market of customers who are willing to pay for the peace of mind?” says Ms Makinde. “Furthermore, all consumers should have the opportunity to enjoy their dining out experience regardless of their dietary preferences.”

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Will BaxterDirector, Head of bars, restaurants and casual diningT +44 (0)20 7865 2771E will.l.baxter@uk.gt.com

Grant Thornton is active in helping clients in the bars, restaurants and casual dining sector meet their objectives. Our dedicated team advises on a range of services including mergers and acquisitions, private equity fund raising, refinancing and strategy planning as well as tax and audit work. Please do not hesitate to contact us to discuss how we can help your businesses achieve its strategic goals.

Charles GreenBusiness development managerT +44 (0)20 7184 4611E charles.ew.green@uk.gt.com

Joanna PennyResearch managerT +44 (0)20 7865 2594E joanna.s.penny@uk.gt.com

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