Inside track: High steaks game

It is a ploy often used in life, be that business, sporting or personal - blame the person in the role/post/situation before you for any issues that appear on your watch. Yesterday’s statement from Equistone, the current backers of Gaucho and its sister casual dining brand, and its new management team, was a case in point. If I was a former member of Gaucho’s and CAU’s management team, I would be feeling slightly bruised by some of the suggestions being put across about their role in its downfall. I think the expression is “thrown under a bus”.

Let’s rewind to the end of 2015. Equistone, which had previously backed Gaucho, had emerged as the frontrunner to back a further management-buyout of the business that operated 14 sites under its eponymous brand and 16 under the casual dining focused and fast-growing sister brand CAU. It was understood to have beaten off competition from Investcorp and another former backer Phoenix Equity Partners to acquire the then Zeev Godik-led group.

As I stated in January, CAU, which launched in Guildford in 2011, provided the momentum to get the Equistone deal over the line and to push the valuation of the business up and past the £100m-mark. At the time of the deal, there was talks of further national expansion for the junior brand – it is thought that Equistone believed that the UK could house up to 80 sites under the concept – plus an international play. CAU’s growth had masked the fact that core brand Gaucho had stalled and, while always cash generative, expansion had been put on the backburner and the rise of a new breed of meat focussed operators, led by Hawksmoor and Flat Iron, had put it on the back foot.

By the middle of 2016 CAU had grown to over 20 sites there were rumours that all was not well at the business, and that the momentum behind CAU was dissipating. The brand’s managing director Graham Hall left the business that July, closely followed by the group’s finance director Gary Mann; Hall’s successor Richard Clark went a year later and last month Tracey Matthews, who spent the past 18 years at the Argentine steak restaurant group, including most recently overseeing CAU, also left – the last member of the previous management team to depart the business. All that time, the brand stood still, while attention returned to putting the core brand back on the expansion trail, with openings in Birmingham and Edinburgh.

In April 2016, serial sector investor Luke Johnson joined the business as chairman, complete with investing a “significant sum”. He to saw a bright future for both brands. By the start of 2017, there were rumours Johnson already wanted out and would not be seeing much of a return on that “significant sum”. His departure was finally confirmed in November of that year. A week later, founder Godik announced he was to step down from his role chief executive after 41 years at the helm of the business. By that time, ex-ASDA chief executive Paul Mason had replaced Johnson as chairman of the Argentine steak restaurant group, and two months later Oliver Meakin, formerly of Mitchells & Butlers and Maplin, was named as its new chief executive. They along with, former Carluccio’s finance director Frank Bandura, who joined Gaucho as chief financial officer in November 2016, are now tasked with seeing through its current choppy waters.

The question is, how choppy are these waters. According to those close to the business, it is dealing with legacy problems of the old management team; that CAU is a failed concept, which never really took-off; that in the last two years it has experienced near double digit like-for-like sales declines, which have accelerated in 2018 as the market has worsened; and that the previous management over expanded – opening six sites each in 2015 and 2016, and that onerous leases and poor site selection has meant that these are the worst performing sites.

Firstly, isn’t this a management team that Equistone was happy to back in a deal valued at c£100m, and in Zeev Godik, a chief executive it was happy to back for a second time. There was no talk of over expansion when it did the deal, only of the opportunity to open more sites. Run-rate EBITDA at the time of the deal was understood to have been c£13.5m, giving the acquisition a multiple of c7.4x. It is thought that total debt was £70m including a £20m capex facility, which was set to fund up to two thirds of the group’s future openings over the next few years. By the end of 2016 EBITDA before pre-opening costs had fallen to £9.4m, compared with £11.9m the previous year.

Just after the Equistone investment, it was understood that CAU sites were generating average weekly sales of c£30,000. For example, the brand’s site in Cambridge was believed to be producing weekly sales of c£40,000, it is now thought to be generating weekly sales of just over half of that figure. If as suggested the brand has been producing double-digit like-for-like sales declines for the last two years, it is amazing that all of the sites have stayed open for this long.

Of course, the business has been impacted by the issues affecting the wider sector. It has also especially been hit by the rising cost of its main ingredient beef, but Equistone certainly did not acquire an unprofitable business. The private equity firm and Godik must take most of the responsibility for where the business is now, chopping and changing management teams, not building on the group’s culture and most importantly not evolving the offer of both of its brands, before it was too late. Morale, quality of offer and inevitably performance have suffered as a consequence.

Sadly, the term Company Voluntary Arrangement (CVA) is being thrown about by the media in the these cases with worrying abandon, and there is no difference in Gaucho’s case. We are told the core brand is performing in-line with the market, Equistone remains supportive, some of the CAUs will be assessed for conversion to its older sibling and that a CVA is just one of the options being explored.

I would imagine that in this case a CVA would be the least favoured option, especially as I understand it would be hard to carry out the process on the CAU estate without the Gaucho business also being impacted. It is thought that a significant number of CAU sites were secured under cross guarantees with its more established sister brand. There would be an issue of Gaucho’s reputation being damaged by being pulled into a CVA process but there must also be a fear that if that can’t unwind those cross guarantees that landlords could get their hands on leases of some of Gaucho’s gold brick sites – say Swallow Street, and re-let to someone willing to pay a higher rent.

Equistone and the new management team are “exploring a number of options” for CAU, including possible closures. Former Gaucho director and founder of M Restaurants Martin Williams approached Equistone late last year when he heard that the company was struggling, with a solution which we thought would help the CAU and Gaucho chains whilst providing “a great expansion platform” for his M brand”. Williams says: “Sadly this didn’t work out, but we will look again at the opportunities which arise in the coming weeks.” I am surprised they, especially Equistone, have left it this long to act, but also that they could have got themselves into a position where the stakes could be higher than just jettisoning a sub brand. Let’s hope they can produce a better hand from somewhere.