M&A: ‘Confidence is starting to return’

Not so long ago a sushi restaurant brand, exposed like its peers to the squeeze on casual dining, Yo! Sushi owner Snowfox was snapped up this week in a blockbuster deal valuing the business at a punchy $621m (£491m). 

Acquired by Zensho Holdings, a leading Japanese food group and foodservice company, the buyer operates a diverse portfolio of businesses, including 2,000-strong beef bowl restaurant Sukiya, the 500-strong conveyor belt sushi restaurant Hama-sushi, and the 1,400-strong family brand Coco’s.

It’s the culmination of nearly eight years of strategic development under the backing of Mayfair Equity Partners, which has seen Snowfox transformed into a global omnichannel food group, with several acquisitions of its own.

While the business hasn’t filed accounts for 2022 making estimates tricky, its previous year’s EBITDA was £34.4m, which would represent multiple of x14 – a double-digital figure unheard of since The Restaurant Group acquired Wagamama for 13.2x EV/EBITDA.

As well as being a story about a casual dining brand’s diversification journey, and a strategic consolidation for the buyer, the transaction represents another sign that the long-awaited return of deal-making activity has arrived after a prolonged post-Covid lull.

With Snowfox the biggest piece of M&A close to the sector in some time, it is accompanied by other signs of life in the market.

Just days earlier, Nightcap, the entrepreneurial listed late-night platform led by Sarah Willingham, acquired Dirty Martini’s 10-strong bar estate in a £4.65m pre-pack deal.

Showing good news comes in threes, experiential leisure business F1 Arcade closed its latest round of fundraising with a £30m investment to fund expansion, amid plans to open more than 30 locations globally by the end of 2027.

Led by Liberty Media and Formula 1, the round had support from Imbiba, the focused fund which has become a specialist in experiential leisure, and follows plenty of interest in other players in the space, such as Swingers, State of Play, Red Engine and Puttshack.

For Snowfox seller Mayfair, the deal comes several years after the firm would have originally hoped to exit, a trend seen across the sector with PE-backed business, such as LDC’s ten-year ownership of D&D London.

Macro conditions

While there may be have been a renewed appetite from buyers, and some sellers have been looking exit for some years, the challenge has been with the financing.

Rising interest rates have increased the cost of borrowing, putting pressure on buyers and forcing them to bid lower.

Meanwhile the debt markets have been reluctant to back the sector, particular leasehold businesses facing uncertainty in their revenue streams, due to volatile factors such as cost inflation

“In restaurants, they’re assuming revenues will be sufficient to pay the interest and then repay the capital. And that’s been a problem because there’s less certainty regarding earnings than there is with assets,” Mark Brumby, CEO of Langton Capital tells MCA.

“As is so often the case, the banks are there when you don’t need them, and when you do, they’re not there anymore.”

Craig Rachel, director (corporate finance) at AlixPartners, agrees the macro environment has made it difficult to get deals over the line.

With so much uncertainty over where interest rates and inflation could move next, it has been impossible to price in, while the consumer squeeze creates a “lot of noise in the numbers”.

“Once you’ve got a period of stabilised trading, you can review the P&L properly, then that is going to help to get to a sensible position,” Rachel says.

“Then you can take it to the investment committee and start to think about what a steady state set of financials looks like for the business, which at the moment is very tricky to do, because you’ll be changing your view for better or for worse, and that’s what makes it really hard for PE to size it up.”

While mid-sized private equity deals have been in short supply, there are exceptions to the rule for stand-out businesses, such as TriSpan’s acquisition of Mowgli.

“It still feels like we’re a little bit of way off for those mid-sized deals, unless it’s an absolute slam dunk of a business, where everybody’s happy to go early,” Rachel says.

Still, as momentum starts to build, and market certainty improves, investors will return to take another look at the sector.

“They will think, what is it that I’m missing out on here? What is it that I haven’t called correctly?” Rachel says. 

“If more and more people start to be bullish, there’s going to be a bit of FOMO there, and they’ll be forced to think, how can I get comfortable and structure a deal? We need to start looking at this and getting our head around it.”

Deal dynamics

So if market conditions are so challenging to predict, what’s behind the recent flurry of deals? One characteristic is the emergence of the trade buyer, which was behind the Snowfox acquisition.

Another Japanese foodservice group Toridoll Holdings snapped up Franco Manca operator Fulham Shore for £93.4m earlier this year, with the potential to build a brand house with its other portfolio investments Marugame Udon, alongside partner Capdesia.

Going back to last year, this phenomenon was kickstarted by Greene King acquiring Hickory’s, the pub group looking for a proven food offer to plug into its large freehold estate.

A strategic trade buyer is particularly compelling during challenging times, Rachel says.

“If it made sense before, it makes even more sense now when the profit environment is more challenging, because the costs that you’re saving, and the potential revenue enhancement opportunities, are significant.”

For founder-led businesses that are struggling with limited capital to expand, joining with a ‘bigger brother’ who can provide additional resources to grow is also attractive, Rachel says.

With trade deals apparently on the rise, what of private equity, which has backed the sector for a number of years, supporting it through dizzy highs and crushing lows?

“It is the case frankly that hospitality has had a right kicking,” Brumby says. “And if you’re a PE house you need to be a bit braver to make a hospitality investment than to make an investment in another sector.”

Having been bullish during the 2010s, PE houses are taking a much more cautious approach now, while those with a remaining stake in the sector are hoping to exit unscathed after a prolonged hold.

“The PE houses might quite understandably say, ‘if you’re so damn good, why hasn’t one of your competitors bought you?’,” Brumby says.

“A bit of that would give the PE houses a bit more confidence and then things might get quite interesting.”

Rachel says PE-backed growth deals are happening, typically with businesses with lots of runway for growth, such as experiential leisure.

What isn’t necessarily happening is PE firms buying out mature businesses with a hypothesis of doubling it and selling it, he says.

“It’s more companies that have four, five or six sites that appear to be a key focus in the current market,” Rachel explains.

“It’s more competitive socialising where you can easily see lots of potential white space to grow into, growing from a smaller number seems a lot more doable.”

One investor active in this space is Darrel Connell, managing partner at Imbiba. While the fund recently made its first exit with NQ64, it has been biding its time looking for suitable buyers for its other portfolio investments.

He says despite some positive momentum, private equity is “totally out of the game” for consumer businesses at the moment.

The media narrative around hospitality, leisure and consumer sectors needs to become more positive before private equity firms decide to revisit, he says.

“I think it will come back, all these things are cyclical,” he adds. “I think hospitality and leisure is proving the most robust in the consumer space.”

Building confidence

While there are encouraging signs, Brumby agrees the media mood music needs to improve to build confidence.

Financial journalists who currently “don’t give a monkeys about M&B” are susceptible to trends and could come back to champion the sector.

“They would change their opinion if there’s a bit of bit activity and it will become self-fulfilling. If it became easy copy for somebody to write about, then the attention would refocus on hospitality.

“This is where I get the idea of a tipping point, these things often don’t happen gradually. They kind of happen in like a herd instinct.”

For AlixPartners, activity is clearly picking up, with several businesses appointing advisors and “gearing up to launch pretty soon”.

“The conversations we’re having with corporates is that quite a few are looking at looking at potential activity. It’s all geared to this piece around starting to get some of that certainty back.”

“As soon as other deals are starting to come over the line, then that’s going to help build that confidence.

“The announcements over the last couple of days feels like it’s the start of confidence starting to return.”

“It is happening. it’s cumulative,” Brumby adds. “It could lead to a dam bursting. All of the interest and the cash is starting to accrue and accumulate, but the end result hasn’t really happened.

“But I haven’t heard any taxi drivers talking about getting into hospitality shares, it’s not really gone to the wider consciousness yet.”