Something to stake your reputation on

Everyone likes a bargain, and judging from the list of names currently linked to the sales process of Gaucho, which, along with its struggling sister brand CAU, was placed on the market in May, there is a sense that there is one to be had.

Over the weekend Core Capital (the current backer of Brasserie Blanc); serial sector investor Hugh Osmond (PizzaExpress, Punch, Strada); and Limerston Capital, which previously invested in POD, were added to the likes of Endless (former backer of West Cornwall Pasty Co); former Gaucho managing director Martin Williams (who has since founded M Restaurants); and Gaucho founder and existing shareholder, Zeev Godik, in having run a slide rule or bid for the business, which Equistone acquired for c£100m at the start of 2016.

As previously indicated by MCA it is thought that all interested parties value the business at under half of what Equistone paid for it two and half years ago, with some bids thought to be closer to the £30m. Again, any deal is likely to be undertaken through a pre-pack administration because of the cross-guarantee structure, which means that the parent company is liable for the financial problems of its loss-making, 22-strong CAU chain.

So, what sizzle would be left in the business for a potential new investor? At the time of its sale to Equistone, it is thought that the brands combined were producing a combined EBITDA of £11.9m and sold off an 8.7x multiple. By the end of 2016 EBITDA had already dropped to £9.4m, and although it had recovered slightly by the end of 2017 to £10m, it is thought to have dropped dramatically in the year to date to c£4.5m.

The finger of blame for most of the company’s ills have been laid at the door of the 22-strong brand CAU. The brand expanded quickly, many would argue too quickly, with 14 openings in 24 months, before, during and after the Equistone investment. At the same time, it is thought that new owners Equistone exacerbated the issue by looking to modify the brand, pushing it further from its original premise and allowing it to lose its way. The brand reported a loss of c£19.5m in the year to end of 2017, on turnover of £25.8m.

The initial review of the business by KPMG found that CAU was seeing double-digit declines in like-for-like revenues, but that the 16-strong Gaucho itself was performing “in line” with the broader restaurant sector. I understand that Gaucho had been seeing a drop in like-for-like sales throughout 2017, falling to as low as -6% at the time of Godik’s departure and to below -7% at the start of this year. It is thought that a number of initiatives led by new chief executive Oliver Meakin have at least seen this decline reversed, with like-for-like sales now understood to be around -1%.

Unsurprisingly, any turnaround strategy will focus on cutting back the CAU estate. It is thought that the existing management team has earmarked up to seven CAU sites to be sold immediately/by the end of this year, with a further nine or 10 set for disposal in the first half of 2019. The remainder would then come under a “retain and rebrand strategy”, which would begin with sites in Kingston and Wimbledon. For the year to the end of April it is thought that the CAU estate generated combined sales of just over £7m, with average sales per week at around c£19k. EBITDA for the period was down 3.8%, highlighting the difficulty of the task ahead and why a pre-pack administration is a possibility.

It is thought that the current turnaround plan would not include any Gaucho closures, indeed the Liverpool CAU might even be considered for conversion to its older sibling brand. It is thought that initially moves would be made to further strengthen the management team with the appointment of a management team, to be followed a refresh of the brand’s identity and design of existing sites. It would not be until the start of 2020 that a return to the expansion trail would be considered.

At the same time, it is thought that head office costs, which currently stand at c£7.5m, would be trimmed by a third over the next 18 months to two years.

So, slash the CAU estate by around 75%, maybe dispose of one or two core brand sites and trim head office costs by a third….and perhaps you could get that full year EBITDA level back to somewhere around £8m, maybe even higher. It is certainly a plan, or variations of it, that have got a number of investors interested. But, is it good enough to stake their reputations on?

Darby back at the races

This September would have been three years since Alistair Darby parted company with Mitchells & Butlers (M&B) and been out of the pub sector, too long some would argue for a man with his considerable experience and talents.

Darby joined Marston’s in 1991 from Mars, working in sales and marketing. After four years he left to join United Distillers, but returned to Marston’s in 1997. He was elevated the board in 2003 upon his appointment as managing director of its brewing division. In 2008 he switched to managing director of Marston’s Pub Company and later became chief operating officer.

By the end of the summer of 2012, he had seen off his main challenger for the top job at M&B, understood to be Steve Richards, the then chief executive of Novus, and was hoping to bring some stability to a business that was constantly finding ways to stop its own progress. Three years later he left the group still struggling to gain any real momentum. But as I asked at the time, was he given long enough to build on the stability he brought to what had been the sector’s longest running soap opera?

Even his predecessor Phil Urban admitted that Darby had done a lot of the hard yards and the crucial behind-the-scenes fixing that was needed at M&B to secure that much needed stability. Darby would have surely argued that the rehabilitation of the one-time market leader was continuing under his watch, boosted by the acquisition in June 2014 of 173 Orchid Group sites for £266m. The perception was that the Orchid deal and its integration into M&B had given Darby more time to push the company further forward. In the end the shareholders ran out of patience with the ongoing sluggish trading.

His return to the sector as chief executive of Brains feels like the perfect fit for the Shrewbury resident Darby to restore his reputation away from the listed arena’s glare and also allow him to bring all his experience to bear across all of the Cardiff-based operator’s divisions – managed and tenanted pubs, plus brewing. You wonder if Darby ever got used to moving from a stable management team at Marston’s to the often shifting sands experienced at M&B. He should get that stability back at Brains.

It will not be easy to follow in the footsteps of the outgoing chief executive Scott Waddington, who has been at the helm for 17 years and overseen an evolution of the business, not least the acquisition and roll out of the Coffee#1. He will also be faced with a company at a crossroads, and not just because of Waddington’s departure. This will include a new brewery, scheduled to open next year; stabilising trading across the company’s c100 managed and c70 leased and tenanted pubs; and whether it can return to the pub expansion/acquisition trail. Last November, Brains effectively exited the English pub market with the sale of eight of its nine pubs in England to Butcombe Brewery. It will be hard to make inroads back into that market, especially as Butcombe’s owner Liberation Group, is keen to make further acquisitions to extend its estate’s geographical spread.

There is also the question of how much of a role Coffee#1 will play in the future of Brains. It is thought that the company is still exploring options to sell a stake in the c90-strong business. Initially it was thought that a management buyin was the only option available, but a restructure, which has seen the chain strengthen its own head office team, means a management buyout is also now an option. Brains will continue to own a stake in the business, whichever route is finally settled on. As an aside, I wouldn’t be at all surprised if Waddington continued to play a role at Coffee#1, if new investment was secured.

There will be plenty in Darby’s in-tray when he starts his new role later this month. He will be keen to get stuck in and make up for lost time.

Leon in the fast lane

The uneven playing field between the level of VAT charged by supermarkets compared with pubs and restaurants is “incentivising” Leon to open restaurants abroad rather than the UK. That was the headline from the John Vincent-led company’s 2017 annual report, and true to its word it followed up that statement at the end of last week, with the announcement of a new franchise agreement to open its first site in Dublin, first of up to 20 planned to open in Ireland by 2023.

Dublin represents the fifth international city location for the company, which has previously opened branches in Oslo, Amsterdam and Utrecht, and is due to launch in Washington DC in the coming months.

I understand that the brand could be soon on the road again. As revealed by MCA last month, the healthy fast food chain has held talks about opening a site in partnership with forecourt operator Euro Garages. The TDR Capital-backed Euro Garages, which acquired the Little Chef business in early 2017, is believed to have submitted plans to open a Leon, possibly a drive-thru, as part of its redevelopment of Bicester Service Station.

However, it is thought that this is the tip of iceberg in terms of what this new partnership could bring for extending the reach of Leon, which is on track to soon open a site in the Center Parcs in Woburn Forest, Bedfordshire, outside the UK. Euro Garages currently owns and operates c4,600 sites across Europe (including France, Germany and Italy) and the US. I understand that Leon and Euro Garages are in talks on an initial c50 site deal, which would include sites outside the UK.

In that 2017 annual report, Leon said it would continue to pursue expansion in the UK, but that it would be the development of the brand in new markets, “principally elsewhere in Europe”, in addition to testing its concept in the US, which would take precedent over the coming years. The UK hospitality sector could have another global success story on its hands….or at least one on the right road to becoming one.