Come Dine with Us Bars, Restaurants and Casual Dining Update

Come dine with us Bars, restaurants and casual dining update

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.

Casual dining is booming The most marked change is in total disclosed value, which The UK foodservice sector1 grew by 2.9% in 2014 to reach a reached a total of just £120.7 million in the first half of 2015, value of £46.6 billion (according to data from Horizons), and is compared with £3.6 billion for the whole of 2014. However, forecast to continue to grow in 2015, as the economy recovers last year’s exceptionally high total value was skewed by a small and consumers gain in confidence and increase their spending number of very large transactions, with the ten largest deals on eating out. The sector is forecast to grow by £10 billion to in 2014 accounting for £3.3 billion of the total (92%). These reach a value of £56.3 billion by 2019. were dominated by Hony Capital’s £900 million purchase of PizzaExpress and Greene King’s £759 million acquisition of Within this, the UK branded restaurant market reached a Spirit Pub Company. Other deals of significant size included the value of circa £17.6 billion in 2014, an increase of 6% from its £304 million sale of Prezzo to TPG Capital, the £225 million sale £16.4 billion valuation in 2013, according to data from M&C of TGI Friday’s Inc.’s UK arm to Electra Private Equity and the Allegra. The branded restaurant market is forecast to grow by £5.6 £250 million sale of ASK and Zizzi, now renamed Azzurri Group, billion over the next five years, with branded players continuing to to Bridgepoint. take market share from independents. Excluding these mega-deals, average disclosed deal value was The casual dining sector grew strongly in 2014 and is expected £60.4 million in 2014, compared with £31.5 million in 2013, and a to continue to outgrow all other channels. With customer visits mere £9.3 million so far this year. 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 2015 After 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.

1Foodservice covers restaurants, QSR, pubs, hotels, leisure, staff catering, health care, education and services Announced M&A activity in restaurants and bars - annually £27.5 million, and has recently said it is seeking to add a third leg to its offering. Number of deals Total disclosed deal value (£million) Second half off to a flying start 80 4,000 Our expectation that M&A activity will pick up in the latter half of the year has 60 3,000 been borne out by a flurry of deals in July, illion)

m all involving private equity: £ (

s • CBPE Capital sold French-themed l

40 2,000 a

e restaurant chain Côte to BC D

f Partners, achieving a 2.9x return on o

Number of Deals e its investment and a 78% IRR for u

20 1,000 l a

V approximately £250 million. • Casual Dining Group, backed by ( 2 2 2 2 2 0 2 0 Apollo Global Management, won the Q 0 0 0 0 0 0 1 1 1 1 1 1 1

+ auction to acquire South American 5 4 3 2 1 0 Q

2 themed chain Las Iguanas, reportedly ) beating competition from five other private equity groups. The deal was The hunt for high quality assets at smaller opportunities earlier on in estimated to be valued at £85 million, their life cycle. It will take time for this drives earlier stage investment and provided Bowmark Capital with a situation to resolve itself as the current With the big-ticket transactions of TGI 3.7x return on its original investment. crop of early stage opportunities mature Friday, Prezzo and ASK/Zizzi at one and grow into tomorrow’s mid-market • Bridgepoint acquired ASK/Zizzi in end of the deal size spectrum, at the players. December 2014 and created Azzurri. other there is continuing significant In July 2015, Bridgepoint used the For example, in May 2015, Palatine interest and activity in small, but fast- Italian casual dining vehicle to acquire Private Equity supported the MBO growing opportunities. The small to London-based Italian quick service of cocktail and restaurant chain, The mid-tier private equity players, who chain Coco di Mama. have a particularly keen focus on the fast Alchemist Restaurant & Bar, in a deal Whilst 2015 is unlikely to match the casual segment of the market, are leading valued at £13 million. Other recent exceptional total deal value of 2014, the demand in this area. Given that most private equity investments at the deal pipeline looks healthy with a number private equity groups typically seek to smaller end of the scale include Piper’s of assets reportedly with sales processes acquire established players with a strong investment in Hickory’s Smokehouse underway or in the pipeline, including La growth pipeline, a minimum of three and Active Private Equity’s acquisition Tasca, YO! Sushi, Gaucho Grill, Bill’s, sites, good trading margins and a business of a stake in gourmet burger chain Giggling Squid, Ed’s Easy Diner and a model that can be rolled out, there is a Honest Burgers. Active Private Equity, number of Gordon Ramsay restaurants. scarcity of suitable targets which do not which also owns a stake in healthy fast food restaurant group Leon, reportedly already have private equity investment. Competition for assets is invested £7 million for 50% of the The competition, therefore, for assets underpinning robust multiples amongst the small and lower mid-market business in January 2015. is intense. In a sector dominated by private The intense competition for the limited supply of attractive and scalable assets Between these two ends of the equity investors, and with few sizeable is supporting valuation multiples. M&A spectrum, there has been a void of trade groups undertaking consolidation trailing EBITDA multiples are typically in transactions in the mid-tier of the market plays, AIM-listed restaurant group the range of 7.5x to 12.5x, with an average as competition for high quality assets Fulham Shore is notable for seeking to of circa 9.5x. Recent multiples reportedly pushes private equity investors to look build a portfolio of restaurant brands. paid range from ASK/Zizzi at 7.5x through at earlier concepts. Groups which would Fulham Shore followed last September’s to Pizza Express at 9.5x and Côte at 15x. normally look for investment in the £20 acquisition of the Real Greek chain The most directly comparable quoted million to £50 million range, are looking with the purchase of sourdough pizza specialist Franco Manca in March for group in the sector, The Restaurant Group, currently operates on a 12.5x EV/EBITDA for companies with brand loyalty or a multiple. Reported deal/earnings multiples ‘following’ from their fans, customers or L king forward only tell half the story however, with high others and provide a means to raise funds growth concepts the difference between a in a flexible way whilst increasing “The sector, perhaps more trailing EBITDA multiple and a run rate brand awareness. than ever before, continues multiple can be profound. The challenge for vendors and their advisors is to position New technology is transforming to evolve through a a concept in such a way that double digit the customer experience combination of new entrants, multiples attach to the forward run rate; Whether London-based or a branded innovation and investment not the trailing figure! offering, it is vital for all players to have a in proven models. On top clear offering and explore ways they can Appetite for alternative finance of this, a supportive macro- differentiate as well as create and harness Crowdfunding has been highly successful customer loyalty. A key emerging trend economic environment and in the hospitality sector, with notable is the increasing use of automation and benign political climate are investments including River Cottage, technology in the casual dining and creating perfect investment Mexican fast food chain Chilango, coffee broader hospitality sector as a tool to conditions. These current shop chain Taylor Street Baristas and improve customer engagement. London-based pizza-by-the-square-slice market conditions are There is a growing demand from concept Pizza Rossa. giving rise to a number customers wanting to pay via mobile of cash out / devcap deals According to analysis by non-profit phone and restaurants are partnering with organisation Nesta and The University of app providers and payment companies where founders are taking Cambridge, equity-based crowdfunding to meet this requirement. Examples advantage of strong pricing reached £84 million in 2014, up 201% include Thai group Busaba Eathai, which to sell down a minority year on year. has teamed up with loyalty platform stake whilst at the same time Leading crowd funding website provider MyCheck to develop a loyalty raising development capital Crowdcube, for example, has raised and payment application. MyCheck’s a cumulative total of more than £90 technology allows customers to check- to accelerate roll out plans. million since it launched in 2011. It has in, pay securely through a wide range of I anticipate the second half funded more than 270 businesses to payment options including PayPal, split of 2015 being a busy period date, and is targeting to fund more than the bill, tip waiters and waitresses and for operators, advisors and 200 businesses in 2015. Crowdcube has leave without waiting for the bill – all investors alike.” previously stated that businesses in the from their smart device. food and drink space account for a third Restaurants are also using technology Will Baxter, Head of bars, restaurants and casual dining of investments. to automate and improve reservations Successful crowdfunding investments and ordering processes, while other reflect the current investment trends in apps can be used to improve footfall. In the bars, restaurants and casual dining London, for example, the CityHawk sector, and many recent opportunities app uses location data to tell customers have exceeded their investment targets. which nearby restaurants have tables free. These include healthy food chain Filmore The technology trend is evolving rapidly & Union, all day dining espresso/cocktail and clearly has further to run as more bar Grind, and Brew, a pub concept restaurants exploit the potential of smart dedicated to selling tea. mobile devices. 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 Developments in food labelling and allergen information: opportunity for compliance The introduction of the much-criticised deemed to be the most common across The new regulation, however, EU Regulation 116/2011, which includes EU states. Food establishments, or their reflects broader trends. Consumers are a mandate to communicate allergen staff members, will no longer be able to becoming more conscious about what information to consumers, has been state that they do not know if an allergen is they eat and the demand for greater received with confusion and cynicism. At present in a particular dish/menu, or issue transparency will increase rather than first glance there may appear to be little a blanket disclaimer that all foods “could” recede. The trend in legislation is starting perceived business benefit to compensate contain allergens. with allergens, but is likely to progress for the effort involved in complying, but Reputational damage is an obvious to nutrition and provenance, particularly business owners, managers and chefs risk. “All it takes is one incorrect piece in the wake of food scares, such as the should reflect on the opportunity these of allergen related information to slip horsemeat scandal. regulations could provide. through the net causing one customer to “Why not leverage new EU regulations The essence of the directive is to have a serious or fatal event, to destroy to make the most of this growing market improve transparency through clearer the reputation and potentially business of customers who are willing to pay for the peace of mind?” says Ms Makinde. labelling statements covering the content, of an operator,” says Yinka Makinde, “Furthermore, all consumers should have processing and storage of both pre-packed founder and CEO of Eatjoy, a cloud- the opportunity to enjoy their dining and non pre-packed food items. The most based service helping food outlets out experience regardless of their dietary significant mandatory element affecting comply with new and emerging EU preferences.” the food service sector is the listing of legislation, turning it into a business food allergens, of which 14 have been growth opportunity.

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.

Will Baxter Charles Green Director, Head of bars, restaurants and casual dining Business development manager T +44 (0)20 7865 2771 T +44 (0)20 7184 4611 E [email protected] E [email protected]

Joanna Penny Research manager T +44 (0)20 7865 2594 E [email protected]

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