Assessing the impact of market turmoil

Things appear to be getting a bit sticky out there. Events across global markets, which are on a volatile roller coaster driven by a credit crunch in the debt market, has seen everyone reaching for old spreadsheets, crystal balls and tea leaves, in an attempt to establish what tomorrow may look like. The past few weeks has seen publicly quoted groups from the sector giving up millions in value. Last week Enterprise was captalised at £2.93bn, having surrendered some £900m since the end of July, Punch was £750m lower than a month ago, Mitchells & Butlers was down £700m as was Whitbread, while Greene King and Marston’s were both off by about £300m. The restaurants caps have also suffered with The Restaurant Group down almost £150m against July, and Prezzo, Clapham and Carluccio’s all looking at substantial falls. Last week was particularly turbulent time for the stock market. One day saw the biggest fall in the FTSE 100 since 2003, wiping £60bn from the value of Britain’s biggest companies. But come Friday afternoon many stocks had bounced, with the value of the FTSE 100 climbing almost 4%, accentuating the general volatility of the current market. No-one really knows what will happen but the events of last week prompted suggestions of the good times coming to end, a pending housing-market crisis and the spectre of full-blown recession. The talk appears somewhat overdone but the uncertainty does not help, and is not going to go away any time soon. “This is a financial market crisis and most of it will stay in the financial markets,” Trevor Williams, chief economist at Lloyds TSB, told The Sunday Times at the weekend. But something has changed – and further change is afoot. Cov-lite debt, and other barmy concepts, are now consigned to the history books. Overnight banks that here-to seemed to be giving unprecedented access to debt are now predictably more cautious. So what are the implications for senior people in the eating and drinking-out market? Doing deals is clearly difficult in these conditions. Transaction prices have come to represent profit multiples that could not have been predicted five years ago. A readjustment feels inevitable. The senior executives within operating companies that I spoke to last week regarded recent events as potentially helpful – in the hope that vendors would come to the market with more realistic price expectations. Private equity, with the current situation hampering its ability to raise cheap debt, would seem a diminished force. We may, going forward, see trade buyers triumphing in more deals. The good deals, those between trade players that hold compelling logic, will still get done. One senior investment banker suggested to me that, with private equity less powerful, the larger pub groups may now get the opportunity to properly consolidate the eating and drinking out market (Greene King for Tragus, anyone?) Clearly the key worry is that what is happening in global markets will register with consumers, possibly prompting them to don the tin hat. Restaurants seem fairly defensive in such a climate – as consumers, our habits have just changed too much, and eating out is just something that we do now. Those at the more luxurious end of the market, like a Conran (D&D London), have more to lose but those that offer an indulgent meal replacement, like much of the UK mass-market casual dining scene, are well placed. As for pubs, the same applies. Those that have successfully adapted their models to capitalise on growing income streams, such as eating-out, are relatively insulated. Those too reliant on drink are perhaps more exposed. To appreciate this, one only has to look at the pain of the big national brewers this summer, all of whom seem to be losing money as volumes continue to fall around their ears. But the odd bite to eat or night out is something consumers surrender far less willingly than other discretionary expenditure. Those in other corners of the leisure market, such as fitness club operators and hotel operators, should perhaps be more nervous about a changing economic climate. However, a more cautious consumer may be a good thing, obviating the need for further interest hikes by the Bank of England, meaning rates may have peaked. Few things are certain but it does feel as though transaction multiples have peaked – and that so has private equity as a force in this market.