M&A market overview | Restaurant and Bars 2021

M&A market overview - Restaurant and Bars

2020 has been a year like no other. COVID-19 devastated the leisure and hospitality sectors around the world, with the majority being mothballed by Governments for months at a time.

Though furlough, March CBILs, April CLBILs, Eat Out to Help Out and, business rates and VAT relief schemes offered a temporary lifeline to UK hospitality operators, many felt this fell short of what was needed. Operators begrudgingly considered restructuring options and often settled on running a CVA programme that compelled landlords to support the sector by cutting rent obligations.

The Restaurant Group, Pizza Express, Côte, Azzuri Group and Pizza Hut restaurants were but a few of the high profile brands that were forced to rationalise their operations in 2020.

Financial stress was not limited to operators. Eviction moratoriums introduced in March (currently extended to 31 March 2021) effectively disarmed landlords. According to Re-Leased, this, coupled with operators conserving their cash, resulted in only 67% of Q1 2020 rents and 68% of Q2 2020 rents being paid within 60 days of them due. Landlord’s own cash flows were strained and the impact of this was seen in the most notable collapse of the shopping centre giant Intu in August.

In Q2 2020, brands were changing hands at 1x– 2x pre-COVID-19 EBITDA multiples. However, this was short lived as the easing of trading restrictions and hopes of a vaccine fuelled consumer, operator and investor confidence.

It’s no surprise that M&A activity in 2020 was dominated by distressed transactions. The opportunity for investors was clear; brands that survived 2020 would benefit from a reduced competitor landscape (with The Restaurant Group estimating 30% of branded casual dining locations nationally will never reopen), landlords accepting reduced rental terms and new sales channels to consumers opening up.

In recent years, EV/EBITDA multiples for restaurants and bar brands have typically been between 7x – 8x but COVID-19 changed things overnight.

As brands battled to adapt to trading restrictions (often with less than 48 hours’ notice) investors lined up to scrutinise business plans and cash flow forecasts. Shortfalls in cash and uncertainty over future trading caused EV/EBITDA multiples to fall to 1x - 2x in Q2 2020. For example:

Food and beverage specialist Ranjit Boparan, who was active throughout 2020, acquired 30 of Carluccio’s sites for a 1x EBITDA multiple (£3.4m total consideration/c.£100k per site) in May. Boporan went on to acquire a further 35 Gourmet Burger Kitchen restaurants in October for £6m/£170k per site.
In July, Epiris acquired 150 Bella Italia, Café Rouge and Las Iguanas restaurants from a pre-pack of 240 site Casual Dining Group sites for c.£18m/£120k per site. Epiris also committed £25m of additional capital to help manage the impact of Covid. The group subsequently rebranded to ‘The Big Table’. Total funding to acquire the best performing sites equated to 2x EBITDA.
In the same month, TowerBrook acquired Azzuri Group, which operated 225 Ask and Zizzi restaurants, for c.£70m/c.£310k per site.
Following a CVA process earlier in the year, RD Capital Partners acquired 10 Chilango stores out of administration in August for a total consideration of £1m/£100k per site.
September saw Partners Group acquire 98 Côte restaurants for c.£55m, with c.£15m understood to be a capital injection. Côte generated a 2019 pre-COVID-19 EBITDA of c.£18m. The deal represented a 3x EV/EBITDA multiple.

For investors, this presented an opportunity to make less than 3x money in more than three years providing the funding of cash loses didn’t drag on too long, subsequent lockdowns wouldn’t require additional cash injections and an exit multiple of 6x– 8x could be unlocked by 2023. Furlough was another complexity with the current support being re-assessed on 21^st January and many expecting it to be phased out over several months.

The quick-service restaurant (QSR) sector, by accidental design, was well placed to navigate its way through H1 2020. In H2, both franchisors and franchisees looked to deploy their growing cash reserves to accelerate growth across multiple channels.

In April, whilst the majority of the UK hospitality sector closed, QSR brands such as McDonald’s, KFC and Burger King started to re-open, prioritising drive thru formats.

Consumers quickly flooded back, relishing the opportunity to enjoy their favourite fast food treats from the comfort of their car. Multiple brands saw weekly like-for-likes recover to 100% and surge north of 150%. According to The NPD Group, between September - November 2020, there were >121m visits to drive thru restaurants representing a 14% increase on the prior year - treating occasions to break the monotony of lockdown were noted as being one of the main drivers. In some cases, the police were called to manage traffic jams that were forming out of drive thru lanes.

An interesting insight into the future of the drive thru segment may be found in the US which saw an equivalent 4.7 billion visits between September – November. If UK consumers continue to gravitate towards drive thru formats and habits become entrenched, the opportunity for the growing segment is clearly vast.

Banks and investors have long recognised this resilience and ability to recover quickly, noting that QSR is often the last segment to experience any distress during a turndown and one of the first to recover. In addition to drive thru formats, the early adoption of technology, well developed delivery propositions and access to significant above store operational synergies have made the sector particularly resilient to pandemic pressures.

Brothers Mohsin and Zuber Issa, founders of EuroGarages and backed by TDR Capital, have been highly acquisitive throughout 2020 – accelerating their strategy to pivot operations from being a petrol forecourt operator to a ‘food on the go’ food and beverage specialist:

In March, EuroGarages (EG) acquired the largest KFC franchisee in the UK and Ireland, the Herbert Group, which operated c.150 sites.
In October, it announced the £6.8bn acquisition of ASDA from Walmart, capitalising on its retail experience and available synergies to beat Apollo Global Management.
In November, Mohsin and Zuber sold part of their equity stake in EG to Abu Dhabi Investment Authority and two Canadian pension funds (Alberta Investment Management Corporation and PSP Investments) at a valuation of £15.2bn.
In December, EG submitted a bid to acquire 650 site coffee chain Caffè Nero ahead of the planned CVA process; though this was rejected by shareholders and the company approved the CVA.

Operators such as Chopstix, Tim Hortons and Taco Bell have also accelerated growth both organically and by on boarding new franchise partners with development rights.

It’s clear that the resilience of QSR brands and white space for growth has caught the eye of investors. Operators often operate multiple brands across the UK, providing additional avenues for growth whilst unlocking enhanced above store efficiencies. Private equity has a track record of success in the sector from Rutland’s investment in Pizza Hut to Alcuin making 13x return on their investment in Krispy Kreme in 2016.

We expect M&A activity across the QSR sector to increase significantly in 2021 as both operators look to put their capital to work and investors seek existing platforms primed for growth across multiple brands.

With monthly cash burns of up to £40m, pub groups have sought financial support from existing shareholders, banking partners and Government COVID-19 relief schemes to shore up their balance sheet and maximise their free cash positions.

Turning to the pub sector, in our 2020 Restaurant and Bars report, we discussed how the year was defined by several ‘mega deals’:

Stonegate (backed by TDR Capital) acquired Ei Group in July for £3bn, making it the largest pub operator in the UK with more than 4,400 sites.
Similarly, CK Asset Holdings acquired 2,700 Greene King pubs and two breweries in October for £4.6bn; a c.51% premium to the closing share price prior to the announcement which in turn caused other pub operators’ shares to increase c.20%.

Trade players such as Punch, Mitchells & Butlers and The Restaurant Group were also rumoured to be looking for acquisition opportunities. Young’s was the only group bucking the trend, choosing to focus on refurbishing their estate starting with Redcomb pubs.

2020 kicked off with an air of positivity. The Competition and Markets Authority gave Stonegate the green light on its acquisition of Ei (provided they disposed of 42 pubs to address competition concerns) and Marston’s, as part of a wider initiative to reduce their net debt to less than £200m by 2023, announced the sale of 29 pubs to Hawthorn Leisure in January.

This optimism was short-lived. As the pandemic reached the UK, and the hospitality sector was forced to shut up shop, share prices started to tumble, reaching their lowest point since the 2008 Great Financial Crisis. Pub groups with a predominantly freehold estate (Fullers and Young’s) fared best with share prices supported by their underlying assets. Mitchells & Butlers, whose estate is more than 80% freehold and long leasehold, saw a significant fall in their share price as nervousness around their significant levels of debt rose (c.£1.8bn as at September 2020). Fullers and Young’s, in contrast, report total borrowings of £205m and £163m

In response to restrictions, Stonegate, Greene King, Fuller’s, Mitchells & Butlers and Young’s quickly mobilised to lobby the Government for enhanced sector support whilst launching their own initiatives for their publicans. A few of particular interest include:

Mitchells & Butlers, who operate c.1,750 pubs, bars and restaurants held a ‘significant cash position’ of £133m in September 2019. The company quickly extended their liquid cash position to c.£250m providing sufficient liquidity for their downside scenario which assumed no sites would open before October and a return to pre-COVID-19 trading being no sooner than July 2021. In November, the group announced that it had total liquidity of £225m, made c.1,300 redundancies in Q4 and had a monthly cash burn of £35-40m.
Stonegate quickly provided rent reductions, trade credits and suspended the annual price reviews for tied drinks in April. To fund these reliefs, Stonegate looked to their investors and successfully raised £950m in senior secured loan notes and a further £120m in share placements.
Greene King also offered rent reductions during lockdown periods of up to 90%, launched a ‘Partner Support Fund’ and began one-to-one discussions with their 975 tenants to understand their respective financial exposure. As at October, the group had provided more than £25m in support to tenants and pledged to replenish stock where it had expired during lockdown.

Although this year began with another national lockdown, 2021 will hopefully stand in stark contrast to 2020. A rebased rental market and an increase in available sites may prove too attractive an opportunity to miss. Rather than waiting for cash flows to rebound, operators may seek external investment to capitalise on market opportunities. We expect the QSR sector to be particularly hot in this respect.

Equally, as transaction multiples continue to recover, investors that opportunistically acquired brands at 1x-2x EBITDA may be tempted to realise their gains.

Whilst everyone holds the highest of hopes that vaccination efforts are successful, all eyes in the sector are fixed on 3rd March when Rishi Sunak is expected to announce his latest intentions for furlough, VAT and eviction moratoriums – currently due to end on 31st March.