In 2013, the UK restaurant market was worth £16.4 billion in revenue terms, according to Allegra Strategies/Grant Thornton estimates and is expected to grow by £5.6 billion over the next five years.

Come dine with usBars, restaurants and casual dining update

As the UK economy continues to recover from the post-financial crisis recession, consumer confidence has picked up, supporting discretionary spending on leisure activities, including dining out. Alongside this cyclical trend, structural changes in consumers’ eating habits are also reshaping the bars, restaurants and casual dining industry and are driving sector transaction activity.

The new norm

In our time poor and cash rich society eating out is the new norm. Formerly considered a luxury and occasion-led, for many eating out has become part of daily life, with what was perhaps a monthly occurrence now more likely to be a weekly one at least.

A broader range of people and age groups are now choosing to dine out, displacing eating at home. Consumers are more adventurous in their approach to food than in the past, and have realised that it is often easier and cheaper to try a new taste experience in a restaurant than at home.

The multicultural nature of British society has been one of the factors driving the increased diversity of national cuisines available to UK consumers. This trend towards greater diversity is most apparent in the UK’s major metropolitan centres, such as London, Leeds and Manchester. In addition to the greater variety of cuisines available, dining patterns have also changed – with dawn-to-dusk dining more commonly available – and the range of price points wider. Inexpensive dining has broadened out beyond the traditional chicken, burger and pizza fast-food chains.

The changing face of the high street

As a result of these changes in eating habits and in combination with the trend towards on-line shopping, the face of the high street is changing. Many high street general retailers have lost out to internet shopping, which has created vacant retail space. Landlords have been prepared to offer deals on leases and more casual dining businesses have been moving onto the high street.

At the same time, the supermarkets are capitalising on the shift to online and convenience shopping by building out their smaller high street outlets. In a recent development, some supermarket retailers are combining the two trends. In August, 99p Stores introduced a new coffee and bakery concept in its 250th store, which it opened in Northampton. The concept will be rolled out across a number of the company’s stores, selling a range of baguettes and pastries and offering customers a coffee and pastry deal.

The trend for growth in casual dining looks set to continue, as consumers’ incomes begin to increase and desires for different dining experiences expand, leading to a rising number of dining occasions. This environment will encourage future transaction activity – both buy and build and also potentially consolidation.

The prominence of private equity

The predominant investment theme evident from recent M&A is the active role of private equity. Demand for quality assets has been strong and private equity has been reinforcing its presence in the restaurant space in recent years. Private equity groups have been particularly active in roll-out opportunities in the casual dining and restaurant sectors. In April, for example, the restaurant group Gusto Restaurants was backed in a £10 million MBO by Palatine Private Equity and in July, Risk Capital Partners invested in InnBrighton, which will be renamed Laine Pub Company. Last year, Graphite Capital completed the management buyout of London-based steak restaurant group Hawksmoor which is rolling out a second brand named Foxlow, while Close Brothers Private Equity bought Cote Brasserie for £100 million last September.

Earlier transactions on this same theme include Bowmark Capital’s backing of the MBO of London restaurant group Drake & Morgan and Piper Private Equity’s investment in Caribbean restaurant chain Turtle Bay.

Private equity and overseas buyers alike are also prepared to take on distressed businesses. In April, Enact, a fund recently launched by private equity group Endless, bought the West Cornwall Pasty Company brand and 35 of its outlets from its administrator. On a similar theme, last August Kuwait’s Kout Food Group bought the struggling Little Chef roadside restaurant group for £15 million. Kout already runs more than 40 Burger King and KFC outlets in the UK and has exclusive franchises in Kuwait for Burger King.

The wide range of different cuisines and restaurant concepts on offer in the UK, particularly in the major cities, continues to attract the interest of overseas buyers looking to import those formats into their domestic market. In July, for example, Gondola Group sold the PizzaExpress chain to China-based private equity firm Hony Capital for £900 million. Gondola also owns ASK, Zizzi and recently sold hamburger chain Byron to Hutton Collins.

Level of activity on the up

These broad, structural trends in consumer behaviour are underpinning M&A activity in the sector and the recovery from the recession is continuing with year-on-year increases in deal volumes. Recently, buyers have paid robust valuation multiples, reflecting the demand for quality assets which are highly scalable. For transaction multiples, the overall adjusted average from 2012 to the present is 10.7x trailing EBITDA, which compares with trading multiples of c.8.4x – 13.6x trailing EBITDA for similar quoted companies.

Announced M&A activity in pubs and restaurants – annually

25

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Q2

2012

Q3

2012

Q4

2012

Q1

2013

Q2

2013

Q3

2013

Q4

2013

Q1

2014

Q2

2014

No.

of D

eals

Valu

e of

Dea

ls (£

m)20

15

10

5

0

1,000Announced M&A activity in pubs and resturnants – quarterly

0

No ofDeals

Values(£m)

No.

of D

eals

Valu

e of

Dea

ls (£

milli

on)

No ofDeals

Values(£million)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

10

20

30

40

50

60

70

80

2010 2011 2012 2013 2014*

*correct as at 30 September 2014

Also of interest are the following themes:

The experimental corporate buyer

Corporates are continuing to roll out their formats and are adopting alternative versions of established models – including all-day dining and express sites. Companies are also showing appetite to be more experimental with acquisitions as they seek to diversify, although in some instances it is too early to say whether these acquisitions will form a permanent part of their portfolios.

2014, for example, saw brewing and pub group Fuller, Smith & Turner expand into the restaurant sector with the purchase of a 51% stake in The Stable, a craft cider and pizza restaurant business. They also introduced their own coffee brand, Brewer Street a few years ago and recently opened their first stand-alone coffee shop. Tesco meanwhile, owns a significant minority stake in coffee shop chain Harris and Hoole and in 2013 acquired restaurant chain Giraffe for £48.6 million.

Aggregators of dining out experiences have also shown interest in UK assets. At the start of September Dutch company DIDIX announced the acquisition of tastecard, the UK’s number one Diners’ Club, which has over 1.5 million members and 7,000 partner restaurants. DIDIX is a market leader in gift cards, leisure promotions and restaurant discount diners’ clubs in the Netherlands, the UK and Belgium. Earlier this year DIDIX also bought subscription-based dining club Gourmet Society and Restaurant Choice, a restaurant gift voucher scheme.

Recent IPO activity

Patisserie Valerie’s successful initial public offering (IPO) in the summer demonstrates that there has been appetite for the restaurant sector in the UK, which has traditionally been low compared to the US public markets (the US markets having more than three times as many listed restaurant entities than the UK). ISDX-listed Fulham Shore, a cash shell set up to acquire restaurants, announced in September that it would be

moving to the AIM market. It also announced that it had acquired Greek restaurant chain ‘The Real Greek’ for £13.9 million.

Whilst there was strong initial momentum early in 2014, an increased air of caution has fallen over the markets recently as several IPOs (including that of Aldermore, Fat Face and Virgin Money) have faltered in increasingly volatile conditions as a result of wider global macro-economic and political sentiment.

Rising appetite for debt finance

Recent debt market activity points to increased bank and capital market appetite for leverage, with a number of businesses turning to the bond markets for funding. The most notable was 2013’s issue by Soho House, the London private member’s club, of a high yield bond for £115 million despite having only £9 million EBITDA. The issue was unusual because £200 million has traditionally been considered the minimum size for a bond to ensure liquidity in the secondary market and £50 million the minimum EBITDA to avoid excessive leverage.

At the other end of the spectrum, crowdfunding has also been used as a source of funding in the casual dining sector. In June, London-based Mexican chain Chilango turned to its customers in an attempt to raise £1m to finance the opening of three new restaurants. To date Chilango’s ‘Burrito Bond’ has raised more than £2 million with the offer of free burritos for investors being used to sweeten the deal.

Deal activity set to continue

The casual dining industry is populated by a large number of small operators, which can grow very quickly if they are positioned correctly and are able to secure the correct funding. These successful businesses can rapidly become challengers to the more established chains. We believe that there will continue to be a significant number of transactions in the sector, through consolidation, diversification and ongoing concept roll-outs.

Trefor GriffithPartnerT +44 (0)20 7728 2537E trefor.a.griffith@uk.gt.com

© 2014 Grant Thornton UK LLP. All rights reserved.

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Rupesh PatelAssociate directorT +44 (0)20 7728 3028E rupesh.patel@uk.gt.com

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

Tracey JarvisResearch managerT +44 (0)20 7728 3275E tracey.jarvis@uk.gt.com

Grant Thornton is active in helping clients in the bars, restaurants and casual dining sector meet their objectives. We have advised on a number of 2014’s deals including the Patisserie Valerie IPO and the DIDIX transactions as well as one of the leading YUM! franchise networks on refinancing its debt facilities with Santander to help accelerate the roll-out of additional outlets. 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 Grant Thornton can help your businesses achieve its strategic goals.

April 2014

Disposal of Gourmet Society and The Restaurant Choice to DIDIX BVRestaurant dining club

Grant Thornton provided corporate finance and tax advisory services

Gourmet Society

£undisclosed August 2014

Disposal of tastecard to DIDIX BV

Restaurant dining club

Grant Thornton provided corporate finance advisory services

tastecard

£undisclosedMay 2014

Aim IPO and Placing

Food Retail

Grant Thornton acted as reporting accountant

Patisserie Valerie

£170 million market cap £79 million raised

Our recent sector activity includes:

August 2014

Debt Advisory and Growth Capital

Casual dining, leading UK based YUM! franchisee

Grant Thornton provided corporate finance advisory services

Project Apollo

£undisclosed

Casual dining