Marks’ theory on Revolution

Deltic Group chief executive Peter Marks has told MCA that a merger with Revolution Bars Group would boost investor confidence through building scale and capitalising on the interest in wet-led businesses.

He also said there would be greater competition concerns around Stonegate acquiring Revolution than a merger with Deltic because of the former’s greater presence on high streets.

He described the meeting with Revolution as a constructive one but said it was clear the board would prefer a cash offer. However, he said he believed Revolution shareholders deserved to know there was an alternative that could grow their investment. He said investors minded to accept Stonegate’s £100m bid “might as well have gone down the garden, dug a big hole and put their money in it for two years”.

He said Revolution had been hit by a series of problems during its life as a public company but that ultimately it had been too small to float and investors had lost confidence in it.

He said if the approach was not of interest to Revolution shareholders, Deltic would continue to consider its options, including a public listing at some point, but would do “nothing that bets the farm”.

He was speaking to MCA following this morning’s announcement that Deltic had approached Revolution Bars Group with the aim of creating a “powerhouse” late-night operator merging the two businesses. The suggestion was centred around an all share merger through the acquisition of Deltic by Revolution using the latter’s shares as consideration. The group admitted that Revolution had rebuffed the approach. This was confirmed by a later statement from the Mark McQuater-led group, which stressed that the board had concerns over both the value and deliverability of the proposed merger.

Marks said that while Deltic, which operates had always monitored Revolution, the current plan was only formulated after Stonegate’s bid at the end of last month.

He said: “We have always been a fan of Revolution Bars and we like the fact they went on the market. We were disappointed to see their share price languish after their profit warning in May.

“At that time we had no more than passing interest and were championing them and their team and wanting them to recover because it’s good for the sector.

“Then came the announcement about Stonegate and we thought – hang on, that looks like it’s undervaluing the business.

We talked to our advisors, Stifel, who said the value of the two businesses together would be more than £2 a share. So, we wanted to explore that.”

He said the all-share merger was suggested by advisors as the most logical way to create a large group but a cash offer had been considered.

On the reasons for rejection by Revolution, Marks said: “Their initial thinking was that they would prefer a cash offer, and we respect that.

“It was a decent meeting but our concern was that Revolution hadn’t been able to put the offer to shareholders. I appreciate that it’s difficult for them to do that but we felt that there was a compelling story to look beyond the cash. After all, fund managers are there to manage funds, not to get their cash back. After two years all they are doing is getting their cash back so they might as well have gone down the garden, dug a big hole and put their money in it for two years.”

On the issues that Revolution has faced on the stock exchange, Marks said: “They haven’t had scale so that’s not helped them. They were probably a bit small. If you’re on the main market, people always say you should probably have profit of £20m with a target of getting to £30m over the next two to three years. Then they have had some issues over reporting. Well, confidence is everything and investors don’t like surprises.”

On Stonegate, he said: “We have no issues with Stonegate, they’re our friends. Our only point is that we think they are undervaluing the business. We really appreciate the fact that TDR Capital have gone against the current and been investing in the sector. We applaud them.”

He said it was too early to tell how the approach had been received and said it was ultimately down to whether investors wanted their money back or shares in a larger company.

Asked why Deltic would want to be a listed company during a period of great uncertainty, Marks said: “The stock exchange allows you to grow your business and take advantage of the scale of funding from places like pension funds.

“In terms of why some in the sector have had a tough time recently – the stock exchange doesn’t like surprises and in a high-growth sector like casual dining, one day you are going to have surprises because supply is going to overtake demand. That’s what happened in the early noughties when a lot of the bar and pub companies hit the buffers after years of expansion.

“We have now seen an adjustment of supply, particularly in the late-night sector, and more stability. There will always be local ups and downs but we see nothing out there on macro scale, be that in our business, Revolution or across the sector that indicates there is a rocky road anywhere. We are also seeing investors returning to the largely wet-led sector. It’s coming back into vogue. A lot of the wet-led business don’t have the wage issues that food businesses have.”

On the potential competition issues of two of the biggest late-night operators in the UK merging, he said: “You could argue that Stonegate would have far larger issues because they would have more of the high street than either of us. It’s usually measured on the market as a whole and when you look around at people like Wetherpoon’s you realise there is more than enough competition out there. There’s also lots of independents. I understand that we are prominent but there is a lot more competition out there than people realise.”

On what’s next for Deltic if the approach does not succeed, he said: “We have always had half an eye on what we should do on a materially different basis but most of our focus has been on running our business, doing the refurbishment, rolling out Bar & Beyond and having a solid business. We are going to do nothing that bets the farm.”