Looking for signs of life

Despite the past 12 months witnessing two of the biggest ever UK pub deals, no one could say that 2019 was a stellar year for overall M&A activity. Those two deals, with the Stonegate and Ei transaction conditional on the disposal of 42 pubs, once again highlighted the robustness of the UK’s pub sector but were outliers to an overall market that continued to be impacted by ongoing political and consumer uncertainty. Investors continued to keep their powder dry in relation to the UK’s restaurant sector, and the majority of food-led transactions took place at the distressed end of the market.

The UK service sector rebounded in December as business optimism jumped in the wake of the Conservative Party’s decisive election victory, lifting some of the political uncertainty facing the British economy. It is hoped that with a majority government now in power in Westminster that some stability and momentum will be brought to proceedings, resulting in the investment pipeline becoming unblocked as investment committees can assess new opportunities with greater clarity.

Every start to a new year brings a sense of optimism and initial figures suggest that the industry enjoyed positive trading over the festive season. Positive trading performance needs to be maintained as cost pressures remain. The primary issue relates to labour, both in terms of cost and supply. There is a war for talent right now for both front and back of house team members and operators are having to remain laser focused on retention. This shortage of supply is combining with increases in the National Minimum Wage (21 to 24-year-olds increase by 6.5%; 18 to 20-year-olds increase by 4.9%; and under 18s increase by 4.6%) to make labour cost a key concern for operators. This environment is driving change in the industry with businesses investing in digital solutions to make life easier for their employees and using creative solutions (such as sharing resources across local clusters) to increase staff efficiency and flexibility.

The UK’s casual dining sector stabilised through the year with fewer restructuring processes being experienced. With a lack of new supply hitting the market and the absence of extreme weather or a football World Cup, operators who have invested in their estates have reported encouraging returns. This is vital in restoring confidence in this sector and points to its cyclical nature. There may still be more pain to come but this year we may see investors look for opportunities to consolidate the casual dining market and derive benefits of scale. We may even see overseas investors looking to get a foothold in this space and taking advantage of a depressed currency.

There remains strong interest in concepts with growth potential, which tap into key consumer trends and provide a differentiated experience. There are a number of leading businesses that have announced that they are considering their options which may or may not lead to M&A or investment deals being completed in 2020 and also a number of successful private equity owned businesses that are in or approaching their exit window. These include the likes of Honest Burgers, Arc Inspirations, White Brasserie Company, The Alchemist, Tortilla, Oakman Inns and Inception Group.

2019 was a robust year for pub financial performance and M&A, and in 2020 we expect further consolidation of both the managed and tenanted sectors, with the likes of Punch, Admiral Taverns and NewRiver (Hawthorn Leisure) remaining acquisitive. The interest generated in the recent c150-strong portfolio of pubs placed on the market by Marston’s, especially from private equity, suggests a good level of demand remains. With the Stonegate Pub Company/Ei Group deal set to complete in the first quarter of the year, there will be disposals from this combined estate (some of which mandated by the CMA) which will allow other businesses to bolster their own portfolios. Regionally, the likes of Brakspear, Liberation Group and Cameron’s all remain acquisitive, putting a number of smaller, managed groups in to play.

In terms of consolidation, it will again be worth keeping an eye on the UK’s food-to-go sector. Last year, Pret A Manger, with its acquisition of EAT, Azzurri Group’s opportunistic deal for POD, and Capdesia investing in Wasabi, led the way, but there is a feeling that this part of the eating out market is ripe for further investment and change. There is also already talk of a consolidation play in the fast-growing food hall or food markets sub-segment, which will see big beasts Eataly and Time Out Market enter the UK later this year. Last year, Andy Lewis-Pratt, co-founder and chief executive of Market Halls, which secured funding from Bridgepoint Capital in 2019, said the company planned to be a “consolidator” in the sector, especially when it came to regional expansion. Elsewhere, competitive socialising remains on trend, highlighted already this year by Roxy Leisure, operator of the Roxy Ball Room concept, securing a £7.5m investment from Foresight Group, which followed Social Entertainment Ventures, operators of Bounce in the UK and Flight Club in the USA, securing $20m expansion funding from Acropolis Capital in November.

Of course, the year will no doubt throw up new and emerging concepts to pique the interest of early stage investors. In March, AlixPartners will unveil the leading performers of the UK’s eating and drinking out sector through our annual Growth Company Index. The list identifies the companies with the fastest growing profits over a three-year period and provides a good indication of those emerging and established businesses set to shape the industry over the next few years and beyond.

The UK eating and drinking out market remains a growing and dynamic market. This was very much in evidence in 2019 where pubs and experiential businesses took up the slack in investment activity from the more subdued restaurant market. This highlights the continued attraction of the industry to investors. With some political certainty provided by the election, more positive news over the trading period and evidence of encouraging returns when investing in sites, we would expect an increase in M&A and investment activity in 2020. The investment market will still be discerning, however, so the need to retain a laser focus on customer proposition and consistent operational delivery remains as important as ever.

■ Graeme Smith is managing director and head of corporate finance at AlixPartners. Craig Rachel is a director at AlixPartners, specialising in leisure sector transactions.