When Fulham Shore accepted a £93.4 million takeover bid from Tokyo-listed Toridoll and Capdesia, the private equity firm, in April, there were some City folk who thought David Page had sold the Franco Manca and Real Greek operation too cheaply.
One investment banker put it succinctly at the time: “Fulham Shore have thrown in the towel and are selling out at less than five times enterprise value to ebitda [earnings before interest, taxes, depreciation and amortisation].”
Seven months on and the same conversation is taking place, only with different protagonists. Apollo Global Management is paying a multiple of nine times ebitda for The Restaurant Group (TRG), yet a number of analysts have played the “too cheap” card. Even accepting that like-for-like comparisons are tricky, the wider market appears to be sceptical, having sent the shares sharply higher to 65¾p, above the 65p-a-share offer price.
• The Restaurant Group backs £700m takeover by Apollo
Tim Barrett, at Numis, the broker, said that the multiple being paid by Apollo was “relatively low for assets of this quality”, particularly Wagamama. He said the noodle bar chain stood out for its market-leading consumer satisfaction scores, consistently superior like-for-like sales, rollout potential both in the UK and America, and a growing international franchise business.
Greg Johnson, from Shore Capital, argued that 65p failed to reflect the quality of the estate, the freehold asset backing and the progress the company had been making in improving its margins and reducing its debt. He said that, on a three-year view, these factors could be worth at least 100p to 120p (although the chances of TRG retaining its independence for three years look remote).
The company’s exit from the underperforming leisure division — mainly Frankie & Benny’s and Chiquito Mexican restaurants — has removed a poison pill that would potentially have prevented suitors from having a tilt at the company. Not that this was an easy process. The recent sale of 75 sites to The Big Table, the Café Rouge and Bella Italia operator, was just the final piece of the jigsaw. During the pandemic, Andy Hornby, the TRG chief executive, had deployed a company voluntary arrangement and an administration to shed 250 leisure outlets, mainly next door to multiplex cinemas or tenpin bowling centres.
Some bankers who specialise in hospitality are questioning whether this could be the start of M&A in the sector after a decidedly fallow period — with the exception of Fulham Shore, of course. Sam Fuller, managing director of Houlihan Lokey, said that with sector stalwarts like TRG and Loungers trading near all-time low multiples, despite strong numbers, it was “very hard to get a buyer to pay a multiple of eight for a business when those two businesses were trading on nearly half that”.
Fuller added that with Fulham Shore and now TRG both being bid for, it was “finally starting to feel like buyers are calling the bottom in terms of valuations”, while the outlook for the sector was also on the up. “I don’t think it will lead to the floodgates opening but I do think 2024 will finally see deals in the sector start to move again.”
The quality of the assets being targeted and their impressive growth potential is the key to the awakening of M&A. Credit to Hornby for recognising that he needed to perform some drastic surgery to cut out the poor-quality, loss-making restaurants. By doing so, he knew he was turning a mixed bag of a business into a sharply honed operation that was likely to attract the attention of suitors.
Barrett, at Numis, joined up the dots in his note on TRG on Thursday, arguing that the situation demonstrated that buyers were finally being attracted to leisure and hospitality businesses trading on depressed multiples on the back of the pandemic. He said TRG provided read-across to quality multi-site businesses such as Mitchells & Butlers, Hollywood Bowl or Ten Entertainment Group.
ADVICE Avoid
WHY Although a higher bid is possible, hospitality investors might do better casting their net wider
SSE
The weather has not been kind to SSE so far this financial year. The Perth-based group’s wind farms and hydroelectric plants have generated significantly less power than expected: 19 per cent below plan in the six months to the end of September, (Emily Gosden writes).
While SSE still expects to deliver earnings per share in line with its guidance of more than 150p this financial year, this remains “subject to weather conditions”.
A lack of wind is not the only headwind. The company has benefited over the past two financial years from the energy crisis that inflated gas and electricity prices, boosting profits for its gas storage sites and gas-fired power stations. The crisis has eased, contributing to the forecast cooling in SSE’s profits, with its earnings per share guidance down from the 166p per share it made last year. The group says that “the lower price environment and more stable market conditions are expected to continue for the remainder of this financial year”.
While fluctuations in the weather and other prevailing conditions are an inevitable variable in the business, they are of less significance than the lasting political and policy climate. SSE plans to invest up to £40 billion in low-carbon energy infrastructure by 2032, most of it in Britain: upgrading its electricity networks, building new wind farms and a pumped hydro storage site, and decarbonising its gas plants.
Most of these proposed investments would be backed by regulated or inflation-linked support mechanisms. Progress has generally been slower than hoped, with planning gridlock and inadequate financial support on offer. But there are signs that things could improve. Despite rowing back from some of his net-zero commitments last month, Rishi Sunak vowed to reform planning rules to speed up delivery of energy infrastructure. And if next year heralds a Labour government, as the polls suggest it will, prospects look even brighter for the company: Sir Keir Starmer has vowed to “rewire” Britain and is sticking by heroically ambitious plans to decarbonise the power sector by 2030. Achieving that is likely to require everything SSE hopes to build, and more.
ADVICE Buy
WHY Long-term growth prospects outweigh short-term headwinds
