Timing everything in deal market

Timing is everything. Greene King’s acquisition of Loch Fyne, which was completed last week, initially took everyone by surprise.

The impressive price of £70m is based on anticipated July 2008 ebitda of £10m. It represents a handsome payday for Hutton Collins, which only bought the business in 2006, and the Loch Fyne management, led by Mark Derry.

The transaction began to look incredibly well-timed towards the back end of last week, given financial events around the world, the impact of which should not be under-estimated. If the bearish sentiments currently visible in global markets continue to prevail, the appetite for deals will drop like a stone and the ability of private equity to finance them, will significantly diminish.

Fear of the unknown is what is gripping the markets. Nobody knows how deep the hole in the US sub-prime mortgage market goes and who will catch a cold. But undoubtedly the banks are vulnerable (the buzz phrase is “credit-crunch”) and this in turn is impacting the equity markets.

Leading commentators were already at the weekend calling an end to large-scale private equity deals, and it may be that the summer of 2007 does in time become the high-water mark for deals in the sector, at least in the short and medium term.

The Greene King transaction came somewhat ahead of schedule for Huttons Collins, which had owned the business for less than two years, but is now thought to be sat on a stonking return on its investment.

Greene King has paid top dollar for a good business, giving it greater exposure to the growth market of eating out. About 25% of Loch Fyne’s 36 restaurants are located in former pubs and its new owner has already identified eight more for conversion. The key to the deal is that Greene King has retained Loch Fyne’s most important asset - its people. The CEO, FD and MD will stay for at least two years and 15 unit managers have been locked in for at least 18 months.

Hindsight is everything but with multiples for restaurant groups where they are and with macro financial change seemingly afoot, going to the market ahead of plan, now seems an inspired decision. The alternative could have seen Loch Fyne go on for another year or more - opening more restaurants and adding to the bottom line - only to realise the same figure because of inferior valuation multiples, brought about by changing economic conditions.

Another deal has also been announced this morning, with Bowmark Capital undertaking a £27m refinancing of Las Iguanas in concert with the management team of Eren Ali and Ajith Jaya-Wickrema, who own 50%. Outgoing backer Piper is thought to have made about six times its original investment. Again, the timing looks excellent.

Nobody wants to call bad news, but a credit crunch will impinge on consumers, the banks and deals. While good concepts and good operators will continue to do well, timelines will need to be adapted accordingly and some deals may inevitably be put on hold, at least in the short term.