Pizza Express: a Gondola or a punt?

There was good news for the restaurant sector last week when Gondola, the newly-named holding company for the Pizza Express, ASK and Zizzi businesses, announced plans for a mid-November float, valuing the business at between £800m to £900m. Following on from La Tasca’s debut on the public markets earlier this year, the move will create the largest quoted restaurant business in the UK and pave the way for other IPOs such as Carluccio’s and Tragus, the operator of Cafe Rouge and Bella Italia. It will help increase awareness of a sector that, given its scale and growth characteristics, is poorly represented on the public markets. While everyone who works in this industry should want to see the company get away without a hitch, it will be fascinating to see if Gondola’s banks and advisors achieve the premium price expectations that have been attached to this business. An enterprise value of £900m, including debts of about £370m, equates to £1.8m per restaurant, double the £900,000 per site that owners TDR paid for the Pizza Express business and well ahead of the £1.3m per outlet paid for ASK and Zizzi. TDR and Capricorn Ventures (the owner of Nando’s is a minority shareholder) have paid about £500m in total to own this business. Investors may struggle to reconcile what has happened at Gondola with the assumed creation of £400m in value – an increase of 80%. This is not to demean the achievements of realising synergies and stabilising the business. The current like-for-like sales figures would suggest this business has undergone a fundamental transformation. The City should probably forget the past and look forward. After all, if fund managers thought the business was being taken private on the cheap they should have hung on. They didn’t. Gondola is being sold to prospective shareholders as a growth story, one capable of opening 25 to 30 restaurants a year under its existing brands, Pizza Express, ASK and Zizzi. It suggests that its UK business can grow from 500 to 800 restaurants without too much sweat yet it is hard to envisage that sort of growth from its existing three core brands. Perhaps Gondola has grand plans for some of its fledgling concepts such as Jo Schmos or Al Rollo, but a far more credible strategy would be to supplement organic growth with acquisitions. Gondola, which is known to have taken a long look at Tragus, could fortify its position as the biggest quoted restaurant business by consolidating parts of this market. This may be part of its plan – observers suggest the company may yet subsume Nando’s, a long anticipated collaboration given Capricorn’s majority ownership. It would certainly seem to need a fourth brand. Advisers will also do well to convince share-buying institutions that this business is superior to others already on the market. According to analysis undertaken by Deutsche Bank, this business should be placed towards the upper end of the restaurant and pub sector in terms of valuation ie it should achieve a premium in value to the likes of La Tasca and The Restaurant Group. Yet La Tasca and TRG appear to be higher growth businesses. Purely in terms of estate numbers, La Tasca is growing its business by about 20% each year. TRG is around the 10% mark, yet the growth prospects laid out for Gondola business – strictly in estate terms – equate to a growth rate of just 6%. It would appear to be out of kilter with usual City ratings, which tend to attach superior multiples to companies with higher growth characteristics. The Deutsche research also suggest the three brands are differentiated. If Pizza Express is an out and out pizza parlour, then Zizzi is a proper restaurant, while ASK is a half way house that combines the best of both sister brands. Thus the three brands can sit quite comfortably alongside each other, allowing the group to cluster sites, creating restaurant destinations – a great way of pulling more footfall into an area. It is a moot point. All three are firmly in the Italian pizza and pasta category and the strategy of the Kayes, who founded ASK, prior to its acquisition by TDR was to target Pizza Express by positioning restaurants as close as possible in location to Pizza Express. All that said it is worth pointing out that this business does have some very good things going for it. For a start it has excellent pizzas, no small matter when you have 497 restaurants selling a lot of pizza. It has highly competent day-to-day management led by Harvey Smyth at Pizza Express and Jo Fleet in the ASK and Zizzi division. This has been supplemented by the appointment of Carphone Warehouse’s David Ross in the chair, someone who knows a thing or two about value creation. Karen Jones, chief executive of Spirit Group and a founder of Cafe Rouge, will also bring a wealth of experience of the pub and restaurant business to the board as a non-executive. It also has some fantastic sites and has some real momentum behind it with like-for-like sales currently running above 3%. One thing that will help this process is that TDR and Capricorn plan to release little equity into the market, opting to retain the lion’s share of their holdings. It will be fascinating to see this process unfold. If Gondola’s advisers float this business with an enterprise value of £900m, they may just have earned their fees.