Where did Little Chef take a wrong turning?

When Little Chef hit the buffers last week, financial experts blamed the high rents of a bullish sale-and-leaseback programme. As Tom Bill reports, those close to the deal believe the problems were fundamental

When Little Chef went into administration last Wednesday, it sparked nostalgic tales of all-day fry-ups and blueberry pancakes. It also had financial experts muttering "I told you so" under their breath.

Eyebrows were first raised in October 2005, when the 234-strong roadside chain was sold to restaurateurs Lawrence Wosskow and Simon Heath for £52m - a high price for a tired brand, according to many.

When Wosskow and Heath cleared the £52m debt with the sale-and-leaseback of 65 Little Chef sites to Israeli property group Arazim for £60m four months later, doubters wondered whether the rent repayments would overstretch them.

But those close to the Arazim deal believe it was operational blunders rather than the rental burden that led to its collapse. One source close to the talks said: "The deal stacked up on paper. If Little Chef had continued trading as it was or even if sales had fallen off a bit, they would have been able to meet the repayments."

Two-for-one deals

The source said a decision to slash prices and offer two-for-one deals in an attempt to lure more people out of their cars was at the root of the problem. "It didn't make more people stop and it simply cut the amount of money going through the tills."

The cost of a full English breakfast was cut from £9 to £4 while a plate of fish and chips with tea dropped from £9.48 to £4.99. At the time a Little Chef spokeswoman said: "There'll be no more credit card breakfasts and no more remortgages required to feed the family on a short break."

But Jonathan Doughty, managing director of food service consultancy Coverpoint, believes the price-slashing was a miscalculation. "All it did was irritate people because they realised they were being ripped off before," he said.

It's an accusation that Little Chef doesn't deny outright. A spokesman said: "The new owners were keen to illustrate just how serious they were about tackling issues and changing customer perceptions. A further review shortly after its launch saw some prices being readjusted."

A closer look at the books supports the theory that Little Chef was not a basket case when Wosskow and Heath got their hands on it. The total rent liability on the 65 Arazim sites was £3.8m. This equates to a yield (rent as a percentage of the £60m purchase price) of 6.3%, which was the market norm. When a business is struggling the yield is far higher and the sale price is proportionally lower.

The source close to the deal also points out that Arazim was one of many interested parties and had to satisfy its own investors that the business was a going concern. At the time of the sale the chain was making about £10m profit on a turnover of just less than £100m. "Little Chef got a good deal," the source said. "The £3.8m rent was fair as a percentage of profit at the 65 sites."

Others suggest that Wosskow and Heath misjudged the situation by failing to set aside enough cash from the property deal to give the business the revamp it needed.

Tony Horton, managing director of food service consultancy Tricon, said: "Rival bidders wanted to put in £30m to upgrade the sites. By the time they had cleared the £52m debt with the £60m sale-and-leaseback deal there wasn't enough surplus cash to invest."

In October 2005, Wosskow told Caterer that he had set aside £10m for reinvestment, half of which had been allocated to develop its new Coffee Tempo! café brand. Horton's theory is borne out by the fact that Wosskow said he planned to spend only £1m revamping the estate.

The Little Chef spokesman again hinted that lessons had been learnt. "As is often the case, these initial views changed with the benefit of a more detailed insight and it was clear that a more sophisticated investment strategy was needed," he said.

But Doughty believes any money that was spent was not used wisely. "An easy win for the company would have been to revamp all the toilets straight away," he said. "Instead, Little Chef has effectively stood still for the last 18 months."

Driving force

A more imponderable impact on the business was Wosskow's heart attack in May 2006, which saw him detach from the business completely. Described by industry observers as "a great deal-maker", he was seen as the entrepreneurial driving force.

But Doughty believes the rot had already set in. "I'm not entirely convinced that it would have made any difference with Lawrence at the helm," he said.

Questions were also raised about the pair's judgement after an audacious bid for Compass Group travel concession business SSP just a month after they had acquired Little Chef. At the time, Wosskow told Caterer the £1b-plus deal was "everything we want to do in one go". The words must now be ringing in his ears.

Little Chef: recent history

• February 2003 Private equity group Permira buys Little Chef and Travelodge from Compass for £712m.
• October 2005 Wosskow and Heath buy Little Chef for £52m from Permira.
• January 2007 Rescue administration deal agreed with RCapital for less than £10m.

*By Tom Bill*Have your say
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