There are numerous challenges in the hospitality sector with a number of high profile groups restructuring, closing sites or refinancing. Despite this, consumer appetite for eating out continues, albeit on a more cautious and discerning basis.
M&A activity in the hospitality sector in 2017 fell in comparison to previous years, recording 69 deals across the year. This represents a fall of 11.5% on the 78 deals that took place in 2016 – and is indicative of the challenges and headwinds in the sector that increased in 2017 and are continuing into 2018. An increase in business rates1, a higher National Living Wage and a weakening pound were a hindrance to growth2.
There was also a corresponding decline in total disclosed deal values. The total for 2017 was £1.55 billion; less than half of 2016’s value of £3.6 billion. However, 2016's total disclosed deal value was inflated by the £1.77 billion sale of Punch Taverns to Patron Capital. Removing this deal brings the two years to a more even footing, of £1.8 billion in 2016 and £1.55 billion in 2017.
Looking at sub-sector deal activity, there was a significant fall in deals in the bars and pubs sector, a moderate rise in casual dining, a decline in deals in the café sector and a noteworthy rise in deals in the online delivery space:
Number of deals across the hospitality sector
Private equity interest
Private equity’s interest in the sector remained robust in 2017 – with a significant boost in private equity investment in 2017 over the previous year, rising from just over a quarter to almost half of deals (25.6% to 47.8%).
Investors in the private equity space continue to target top tier operators with niche offerings, a pipeline of new site openings, good management teams and strong like-for-like trading data.
Major auctions were thin on the ground in 2017 due to a combination of private equity having already invested in the majority of sizeable assets in the UK and the timing of the investment cycle. As a result, private equity provided growth capital to a number of smaller, niche operators in 2017.
Piper made a significant minority investment in Flat Iron, providing £10 million to the London-based steak restaurant group. Mobeus Equity Partners provided £2.5 million of growth capital to Tapas Revolution, a UK restaurant chain founded by chef Omar Allibhoy, now with seven sites and plans for more.
In the café segment, BGF invested in Northern Irish coffee shop group Bob & Berts and 200 Degrees, a coffee shop operator and wholesale business, secured £3 million investment from Foresight. Foresight also invested in Mowgli Street Food, an operator of authentic Indian street food restaurants in Liverpool and Manchester, providing £3.45 million of investment to fund the roll-out of further sites around the UK.
The ever-growing interest in wellbeing and health continued in 2017, as evidenced by investors backing deals with LEON, Friska, and Filmore & Union.
LEON Restaurants sought to progress its international expansion in 2017 with the support of two new investors. May saw Spice Private Equity acquire a minority stake in LEON for £25 million. Then in August, Umoe Restaurant, a leading Scandinavian restaurant group, formed an agreement with the near 400-site operator to support LEON in its expansion plans across Scandinavia for an undisclosed stake in the company.
BGF provided £3.5 million investment to Filmore & Union, a chain of 14 restaurants and delis serving healthy food in the North of England and the Midlands to accelerate its new site roll-out. Meanwhile, in the South of the country, YFM Equity Partners acquired a minority stake in Friska, which operates healthy fast food restaurants, for £3 million. YFM will support Friska in expanding its portfolio beyond its Bristol origins and stronghold, including a number of sites in Manchester.
Whilst private equity appetite in the hospitality sector remains healthy, private equity buyers are being more discerning in where they invest in the sector, in line with consumers' behaviour.
Pubs and bars
In the bars and pubs sector, the number of deals dropped significantly compared to 2016; with 19 deals taking place over the past 12 months compared to 32 the year before. In line with buy-in-build strategies, 58% of deals saw private equity-backed entities make acquisitions.
Stonegate, an operator of 700 pubs and bars including the Slug & Lettuce chain and backed by TDR Capital, was unsuccessful in its £101.5 million bid to acquire Revolution Bars. However, Stonegate did build its portfolio by acquiring three London venues from Faucet Inn and in September, Bar Holdings, which operates five bars trading under the Sports Bar & Grill brand. With four of the five bars situated in major London transport stations, the acquisition gives Stonegate access to the transport hub market.
Elsewhere, Laine Pub Company, the London and Brighton-based pub operator and craft brewer, acquired six sites within the M25 from the New Pub Company, and four London sites from Distinct Group. It has been reported that Risk Capital Partners, which invested in Laine Pub Company in 2014, is now looking to sell the group with a price tag of £60 million.
Having backed the MBO of Liberation Group in 2016, Caledonia Investments supported the Channel Island-based pub operator and its UK brewery and pub operator Butcombe Brewery in a series of acquisitions in 2017. Its tally in 2017 consisted of two Somerset pubs from British Country Inns, four pubs in the West Country for £4.3 million, The Castle Inn, its first pub in Dorset, and eight pubs from SA Brain around the Bath and Bristol areas. The company now operates circa 100 pubs, and its additions are a step towards the Liberation Group's long-term goal of doubling the size of its estate to 200 pubs across southern England and the Channel Islands.
The squeezed middle of casual dining
In the casual dining sector, there were deals among value and fast service operators as well as among high-end brands. At the premium end, Minor Hotels, a Thailand-based hospitality and leisure group, acquired a majority interest in London-based restaurant group Corbin & King for circa £60 million. The transaction provided an exit for Graphite Capital, and added London-based assets, including the Wolseley, The Delaunay, Brasserie Zedel, Colbert, Fischer's and Bellanger, to Minor’s portfolio.
At the lower end of the sector, quick service (QSR) and fast casual brands were particularly active areas for M&A in 2017. Bridgepoint reached an agreement in November with Restaurant Brands International Inc to become the UK master franchisee of Burger King, with exclusive rights to the brand in the UK. It simultaneously acquired Caspian UK Group, one of the UK’s largest Burger King franchisees with 74 restaurants. Guy Hands, the UK-based investor, acquired the Nordic operations of McDonald's Corporation (435 restaurants in Denmark, Norway, Finland and Sweden) in 2017 for an estimated $450 million.
In December 2016, Yum! Brands Inc. commenced a sale process for the majority of its UK KFC restaurants, announcing plans to sell 180 out of its portfolio of 230. Several transactions took place in 2017 as groups of KFC sites were sold to franchise operators, alongside the sale of individual sites. Further divestments are to follow in 2018.
However, the ‘middle’ of the casual dining sector has been confronted with some structural challenges. Following a period of aggressive expansion, with a sharp rise in competition, a number of well-known chains are now undertaking restructuring initiatives.
As is common in times of uncertainty, the ‘middle’ section of the market has fared the worst while value and premium brands are less affected. This has been exacerbated by a shift in consumer behaviour, with brand loyalty factoring far less in purchasing decisions, with the trend for home delivery increasing.
Consumers may be suffering from brand fatigue. They are increasingly seeking a more unique experience in terms of food, environment and service, in line with that offered by independent and smaller operators. This is especially prominent in the fast-casual end of the market, where younger consumers are eating out more but are conscious of the quality of the experience. These changes have played a part in the difficulties at Byron Burger, and now Jamie’s Italian restaurants3.
More than ever, operators need to have a niche offering and be innovative. It is far from the end of the road for the casual dining concept, but operators need to review their offering in light of a changing marketplace and adapt accordingly.