Bill Gates may be the world's best known entrepreneur. But the UK restaurant industry holds up the holy trinity of Luke Johnson, Hugh Osmond and David Page as its gurus. Restaurateurs the length and breadth of the country dream of being the next PizzaExpress and pocketing the millions these three made in taking their pizza company public.
The restaurant success story of the decade, PizzaExpress listed on the main UK stock market in 1993 at 40p a share. Today the shares are trading at 950p.
But for every company that intends to float, only a few can make a real success of it, even when eating out is the flavour of the month. Companies expecting an easy route to market at the moment - given the sector's popularity with investors - could be in for a shock. Securing a listing is by no means a short-term route to riches, as the experience of some of the best-known companies demonstrates.
Spread the risk
Groupe Chez Gérard floated in March 1994. Neville Abraham and Laurence Isaacson saw the potential for a listing towards the end of the last recession. "We could have either stayed private and relatively small or expanded in line with our potential and spread the risk among other investors," says Abraham.
The company floated on the main market with just a handful of restaurants at 112.5p a share. For about a year the share price traded below the flotation price. "In retrospect, we pitched it a little too high. But four years ago restaurant companies were nobodies. We were pioneers in a way," says Abraham. Patient investors have since been rewarded with a share price that reached 352p this month. "Now, the City has more respect, but there is an element that has gone from not recognising the [restaurant sector] as an investment opportunity to expecting too much," he says.
High expectations can give a small company a real headache. For a start, a public company is constantly under scrutiny and must be run by the book. "We weren't worried about that because we were already running the company like a public one," says Abraham. But other entrepreneurs have found the constant scrutiny difficult.
Managing director of Nando's chicken restaurants Robert Enthoven's experience of listing in South Africa taught him some valuable lessons. "The most dangerous thing you can do is run your company the way the market wants. There is a huge pressure to run the business according to the share price, to improve margins and put prices up when you shouldn't," says Enthoven.
Timing is critical
Enthoven is hoping to avoid these mistakes when he floats in the UK in 2002. By then he hopes to run a group of 65 restaurants. But he knows that timing a flotation correctly is critical and that his 2002 timetable may not be met.
One entrepreneur who is happy to name a date is Paul Montalto, founding chairman of Elite Restaurants, which owns seven Tortellini pasta restaurants in the South-east. Montalto is currently talking to stockbrokers about a listing on the Alternative Investment Market (AIM) in January or February next year. Turnover is currently at £3m and Montalto plans to raise £3m with the flotation.
Ivan Taylor, who recently led a venture-capital-backed management buy-in of Pizza Piazza from Whitbread, is also considering AIM but is much more cautious about committing to a timetable. He rules out any likelihood of floating in the next six months, but suggests that it might happen in 18. "For anyone considering going to the market it needs to be a question of when, rather than if," he says.
According to Taylor, the restaurant market has been particularly frothy for a couple of years. Trade sales, such as Browns restaurants to Bass, have seen restaurant companies valued on high multiples, and restaurant shares have outperformed the market considerably.
One consequence of this is that offer prices for new issues might be unreasonably high. However, Taylor does not underestimate those who are now coming to market. "Not many people are chasing Plc status for the sake of it," he believes.
John Barnes, chief executive of Harry Ramsden's and a veteran of the stock market for nine years now, agrees that the prices being sought are high. But he also suspects many directors talk of flotation in order to attract a trade sale.
Harry Ramsden's is a good example of a company which has received attention beyond all relation to its size, just because it is public. With market capitalisation of just £35m, the company's share price hit its peak last year of 392.5p at the height of a takeover bid.
"We're listed alongside S&N. People judge you by the company you keep," says Barnes, who has carefully managed the company's public profile and investor relations. Even so, the company underperformed in its early years. Having floated at £1, the share price instantly went down for nine months to 60p, which brought in more canny investors, according to Barnes. Now at 342p, Harry Ramsden's has rewarded those shareholders who acquired the stock as a long-term investment.
And rewards aren't there only for investors. According to PizzaExpress chairman David Page, being able to motivate staff through share options is an important aspect of being a public company. Some of the company's area managers have made more than £200,000 in the past two years by exercising options. Nothing breeds staff loyalty like the opportunity to pocket a small fortune.