It must feel like a sense of déjà vu for Revolution Bar Group’s recently appointed chief financial officer Mike Foster. Last December, as chief financial officer of the Walkabout-brand operator Intertain, he worked on its c£40m sale to the TDR Capital-backed Stonegate. He can probably dispense with any small talk this time, as barring any unseen bumps in the road, it looks like Stonegate’s £100m offer for his new company should go through.
It will be acquiring a company that has gone through quite a change since McQuater, who previously ran Barracuda Pub Company from 2000 to 2012, took over from co-founder Roy Ellis in March 2013. Synonymous with the term vodka bar, McQuater has not just spent the last four years shifting the spirits mix, but also transforming the company’s core eponymous brand – making it softer, more accessible, more all-day, less drink reliant; ramping up its food offer; and placing more emphasis behind the Revolucion de Cuba brand and pre-booked sales.
The initial results of the group’s Evolution plan, saw the company witness a “pretty dramatic difference”, with sales at evolved sites growing 20% and profits lifted by about 30%. “And it’s a different crowd that come in,” McQuater pointed out. “The whole object is to make sure that at the evolved bars they are much more day-friendly.”
As McQuater said six months after his appointment, the late-night business, for which he believed the then Inventive Leisure was the envy of its competitors, wasn’t really the main battleground. It was the post-work/early evening period, “where you really are having to offer something that isn’t DJ music/atmosphere driven, and it’s not food driven”, where the true battle exists.
“The evolution is about teeing the bars up particularly so they can hit that spot,” he explained. “At that point - and the early signs are very strong - we will have a superb all round premium brand that they can operate from lunchtime food all the way through to good quality evening trade in sufficient volume, and a perhaps little bit of that more exciting experience after 11 o’clock.”
Over the next 18 months, the company invested £10m under its Evolution programme, redeveloping 37 bars with an average spend of £270k. In the two years leading up to its IPO in March 2015, McQuater and Revolution had helped each other restore their reputations. From a failed sales process in 2012, the company has dusted itself down and under McQuater impressively re-invented itself leading to a re-engaged consumer and an uplift in sales.
For McQuater himself, the work he has carried out at Inventive/Revolution has in many eyes restored a reputation that had been tainted by the final days of Barracuda, a business he spent 12 years building and at the one point operated c220-sites and generated c£150m in turnover, but under new name Bramwell Pub Company, fell into administration a little over a year after he left. Stonegate would end up buying the core of the Bramwell estate from the administrators for c£35m in November 2013.
The next stage of the now 58-strong Revolution Bars Group, started on 13 March 2015, when the group was listed at the lower end of its price range, 200p, which gave it a market capitalisation of £100m. It immediately set out further ambitions to grow the business, eyeing a combined estate of around 140 bars and targeting a roll-out of up to five new bars per annum.
Steady like-for-like sales growth followed the listing, but for such a robust business with a healthy pipeline, the share price stubbornly refused to take off, highlighting perhaps the city’s continued aversion to late-night bar and club operators. The first bump in the road appeared last year when the company announced it was in discussions regarding the acquisition of four bars in Edinburgh, in a deal value at £16m.
The company said the acquisition would introduce a further brand, which it believed to be capable of being rolled out to other sites. It was understood that Montpeliers of Edinburgh, was the business in question, with its flagship boutique hotel, bar and restaurant, Tigerlilly, the roll out bran in waiting. However, just four days later, Revolution announced that it had terminated discussions regarding the proposed acquisition, highlighting market uncertainty following the result of the EU referendum.
The City and some commentators were not too convinced by the reasoning behind the termination of the deal, whilst the group’s inability to hold on to a chief financial officer over the last 18 months, Foster the current incumbent is the third person to take the role during that time, has also not been helpful.
Which brings up on to the company’s update to the market in May, where it gave a brief update on expectations for the 52 weeks to 1 July, reporting like-for-like sales up 1.7% but stating that new sites were taking longer than expected to hit full profitability. The group said that the impact of headwinds such as the living wage, minimum wage, apprenticeship levy and business rates would be more than anticipated in the current year.
The result was a c40% decline in the group’s share price to c125p, an overreaction according to McQuater and one that didn’t reflect “the core strength of this business”. However, it was one that inevitably lead to speculation that the business could become an acquisition target for the likes of Stonegate or private equity, whilst also placing a question mark over the position of its current management team.
Just over two months later, Stonegate has made its move, offering a 200p a share bid that values the group at the valuation it listed at, £100m. The move saw Revolution shares climb 56p to 181p, an increase of 45%.
Some are already calling the offer a great result for McQuater, as it equates to a 60% premium and shareholders taken out at IPO price, especially after the rocky road the business has encountered over the last few months.
It also looks like a good piece of business for Stonegate. If successful its can add the Revolution brand to its already strong format palette, and with the likes of Walkabout, Slug & Lettuce and Yates provides it with a very strong high-street wet-led branded, leasehold presence, pushing it closer to the 750-strong estate mark.
If successful, it will be acquiring a company with a good pipeline in place, a net cash position and a track record for generating a 38% cash ROI – a mark similar to its own. As I have said before, Stonegate has not let the disappointment of not getting as much touted IPO away, with a £595m refinancing earlier this year giving it further ammunition to continue to consolidate the wet-led, high street sector. It will be interesting to see if Stonegate now follows up its interest in Be At One. As I understand it, the company was one of three business, alongside Bowmark Capital and Duke Street Capital, to have made it through to the final stages for the Piper-backed cocktail chain. Some have suggested that the need to integrate one bar group may preclude it trying to do another one at the same time. However, Stonegate under chief executive Simon Longbottom has become a master of integrating new businesses without missing a beat in terms of the trading performance of the wider company. Whether it will also cast its eye over the Deltic Group is another question entirely, and competition issues aside, it would allow the company to close that late-night sector circle.
As I have written before, on acquisitions, Longbottom has a rule of thumb that the company has to be able to learn up to three things from the business it is acquiring. From Maclay Inns it learnt more about operating accommodations, from Walkabout operator Intertain it is looking to enhance what it can achieve around sporting events. It has become a well-oiled machine in the integration of new teams, formats and locations. As Longbottom puts it: “Acquisitions are our life-blood. It’s brought us some terrific synergies and terrific people.”
So what can it learn from Revolution? A greater insight into pre-booked sales, melding a food offer with a traditional late-night model and enhancing the group’s drinks mix and theatre.
A successful bid will also again test the company’s ability to successfully trade many formats in close proximity. It will be interesting to see, as the company is currently doing with Walkabout, what in its current estate will become a Revolution and visa versa.
I also believe that, in line with the rest of the sector, Stonegate will need to the meet the challenge of continually refreshing its more established high-street brands in Yates’s and Slug & Lettuce, especially as a younger demographic moves towards less-branded, more “authentic” concepts and experiences. Revolution and Revolucion de Cuba – in some evolved form - may play a significant role here.
Unlike its great high-street rival JD Wetherspoon, it is not short of options when it comes to moving with the whims of the consumer and changes in city and town-centre drinking circuits. Bid complications aside, you expect it will soon have another option to add to that increasingly impressive mix.
