Jacobs Media Group is honoured to be the recipient of the 2020 Queen's Award for Enterprise.

What determines true value?

22 May 2006
What determines true value?

Do Aramark and Elior's plans to return to private ownership herald a coming sea change in the structure of the contract catering industry and its relationship with its financial backers? Jonathan Knight, head of management services and business development at Tricon Foodservice Consultants, examines the sector's relationship with its investors.

There has been much press comment over the plans of Aramark's chief executive officer Joseph Neubauer to take the £3b-plus company private, which came swiftly after Robert Zolade's announcement that he plans to do the same with the £2b-turnover Elior Groupe. Is this a flavour of the month or is there more to it?

Both parties believe they are undervalued by their respective stock markets because investors want quick results and high net profits and do not really understand what the contract catering/concession business is all about.

The recent falls from grace of one-time pumped-up powerhouses Sodexho and Compass have probably added to the stock markets confusion.

It's also significant that the mid-sized, privately-owned companies are currently enjoying growth spurts, suggesting that private ownership offers operators more control over their destinies.

In order to go private, Nuebauer and Zolade will need to repay existing shareholders at rates offering a premium above today's values - quite a big financial hit to start their businesses off. Both, however, appear to have sound backing from private equity funds and supporting banks.

Normally such fund holders would also be seeking quick returns for their backers, so perhaps the message is at last sinking in that contract catering is not about quick fixes and fast-buck returns. It's about a steadily-growing but undervalued support service which entails low capital investment and little risk

Businesses with this profile should not expect (and could not justify) EBITDA's in double figures and growth at 20%-plus, but they should confidently demonstrate an ability for steady growth and an appetite for improved efficiencies that lead to a healthier bottom line.

There is a real question whether the contract catering industry can survive in its current guise. It is being gobbled away at one end by competition from fast-growing retailers and chain operators. At the other end, its financial backers have been led to expect results which have been proved to be neither warranted nor sustainable.

The steps proposed by Aramark and Elior represent very important stages in this evolution.

They will still have to perform at commendable levels to satisfy their new owners but, assuming they manage their shareholders firmly, they have the chance to restore the product quality and service attention that have withered in recent years to satisfy shareholders' demands.

They should benefit from less interference from the stock market and out-of-touch directors and be able to move more rapidly to introduce best practice across their businesses.

They will also have the opportunity to demonstrate a real point of difference from the big players and a tangible offer to counter the threats of the more nimble mid-sized operators.

If they get it right, they may receive the price-to-earnings ratio accolades that they believe are justified. But can businesses with this risk and investment profile really expect the multiples of 20-plus achieved in the higher-risk restaurant and bars sector? Probably not, but they'd be a sure bet for every pension fund portfolio manager.

Another one to watch in this market evolution is Compass. From a previously staunch "foodservice-mainly" proposition, new chief executive Richard Cousins now plans to add shareholder value by diversifying into multi-service.

I hope he's not expecting higher multiples as a result - perhaps he should follow the lead of his peers and sell the remaining non-core bits and take the remainder private.

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Jacobs Media Group is honoured to be the recipient of the 2020 Queen's Award for Enterprise.

The highest official awards for UK businesses since being established by royal warrant in 1965. Read more.


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