The past 18 months has seen the sales of businesses or properties as a group dry up. Ben Walker reports on the alternatives and what the future may hold for the market.
There is a growing amount of interest from investors in the hospitality sector as they react to low returns from savings accounts and want to use their cash to get back into the market, according to specialist leisure property agents.
Mark Sheehan, managing director at Coffers Corporate Leisure, says: "Now, there are lots of would-be buyers of groups, mostly private equity houses, which are interested in buying a business and rolling it out."
The problem, however, is that there are few groups for sale, although there are tentative signs of the market picking up. "Serious interest" is currently being expressed for a "sizeable" UK hotel group which is being marketed confidentially through hotel and licensed property agent Colliers Robert Barry. If and when the sale goes through, it would represent the first bona fide UK hotel group sale for almost two years.
TOP OF THE MARKET
To understand where we are now, we need to look at how things have changed over the past 18 months. At the top of the market, before spring 2008, it was common for groups of properties or businesses to be sold at prices in excess of their individual values - what's known as an overbid.
"If, for example, you are a managed pub company, buying individual freeholds takes a lot of time, effort and cost. You still need to let the property with the associated risk of not knowing exactly how the new tenants will perform," explains Simon Hall, a director at chartered surveyors Fleurets.
"However, by buying a group of tied pubs with the tenants already in place, the result is a reduction in administration costs and time, and a removal of risk, which justifies the overbid. The purchase represents a seismic step forward in buying power and security," he continues.
In the hotel sector, probably the last outright sale of a UK group was in March 2008, when the total share capital of Paten Hotels, held by a number of individuals, was sold to BDL Select Hotels for about £40m. Paten consisted of four mid-market provincial hotels.
The credit crunch and the recession have put the brakes on merger and acquisition activity by hospitality companies, and investment by private equity houses is now down by more than 95% compared with the frenzied activity witnessed during 2006-07.
The multiple-site transactions that have occurred in recent months have all been forced sales of one kind or another, either to raise much-needed capital, such as the disposals undertaken by managed pub companies Punch Taverns and Enterprise Inns, or to take a business out of administration, such as Giraffe's acquisition of 11 former Tootsies restaurants in October.
Owner Clapham House Group had unsuccessfully tried to sell Tootsies for more than a year before it withdrew its financial support and took the pre-pack administration route. Sheehan, who advised on the sale, comments: "It wasn't that nobody wanted to buy Tootsies. It's just that people were nervous about expanding at such a time and there was no ability to borrow."
The Tootsies-Giraffe deal, therefore, reflects three current market trends: the availability of distressed assets at discounted prices - 11 leasehold sites for £2.5m represents very good value; the involvement of private equity - Giraffe is backed by Luke Johnson's Risk Capital Partners and the 3i Group; and the ability of purchasers to cherry-pick from a group portfolio - Giraffe bought only 11 of the 21 sites for sale. The remaining former Tootsies restaurants are being sold off in ones and twos to a number of casual-dining chains.
Generally speaking, for businesses in administration, a quick sale of the whole group is the preferred outcome for the creditors, since it limits the cost of the administration. With a prolonged site-by-site sale, there may be other added costs, particularly in the case of vacant properties where the risk of vandalism increases.
But group sales of failed businesses are difficult to achieve at the moment because purchasers are in a strong position to cherry-pick and, if a deal is not tailored to their needs, they can easily walk away.
PREPARING A GROUP FOR SALE
The key to a successful group sale is preparation in the early stages before bringing the group to market, says Peter Brunt, head of the insolvency and bank risk team at Colliers Robert Barry. The information memorandum for a group sale can easily run to more than 60 pages and it needs to be easy to understand.
It is important to include everything that will enable a buyer to make a decision, such as full trading accounts of at least three years, property rights and a full profile of the management team. Do not be tempted to omit any perceived negative aspects of the business since they will only be discovered during due diligence. Be straightforward and the sales process will be smoother.
A major risk is timing. Is it a good time to sell? Has the vendor taken the correct tax advice? Is the group being sold as shares or assets? For the purchaser, the advantage of buying the shares is that the tax cost is much lower, with stamp duty of 0.5% instead of 4%, but the disadvantage is that the purchaser assumes all the assets and liabilities of the company. The shares purchase is likely to include elements such as the head office function which are surplus to requirements. A huge amount of due diligence will be required to confirm that the purchaser is not inheriting something nasty in the history of the company.
A confidential sale is usually the best route to take since it avoids upsetting staff and potential damage to the business's reputation. This is especially the case with hotels which rely on a large amount of wedding revenue.
Usually, the group needs to provide a clear synergy for the buyer. If the group consists of a four-star city centre hotel, a country pub, a high-street wine bar and a budget hotel, the question must be why such a disparate collection of businesses are being sold as a group.
Do not accept the first offer that comes along. Sellers should be aware that the highest offer may not be the best. After tax, its net realisation may be lower than other offers.
So how will the transaction market change in 2010? The temporary cut to VAT will be stopped at the end of this month. At that point, VAT will go up from 15% to 17.5% and its impact is likely to tip more hospitality businesses into administration during the hard trading months of January and February.
"It's still very tough out there. I'm not saying there'll be loads of distressed sales but there will be further casualties. The market will pick up slowly over the next 18 months," Sheehan says.
Simon Chaplin, a director at property agent Christie & Co, predicts that group sales will start to return in mid 2010. "It's a lot cheaper for groups such as Tragus and Gondola to do group deals. They are still looking to expand and are driven by City money."
In the meantime, and until the supply of distressed sales dries up, the availability of quality businesses for sale is likely to be limited. An alternative to putting an entire business up for sale, however, is to sell a minority stake to private equity in order to provide an injection of capital. In the restaurant and bars sector, Sheehan has noted an increase in such confidential deals.
Restaurant group Giraffe bought 11 Tootsies sites when the chain collapsed into administration after parent company Clapham House Group withdrew its support
Enterprise Inns (above) and Punch Taverns (left) have both sold off pubs in the past few months in order to raise cash
CASE STUDY - WALKABOUT-BRANDED PUBS
The lack of funding in the hospitality sector has curtailed the number of multiple-site deals that have taken place over the past 18 months, with distressed sales making up the majority of such deals. Despite this, a few small group deals have been completed this year.
In June, Christie & Co sold a package of seven Walkabout-branded sites spread across the UK to Cavendish Bars for an undisclosed sum on behalf of what, was then, Regent Inns.
The sites, which are all leasehold, were the Walkabouts in Brighton, Bromley, Durham, Oldham, Putney, Southampton and Swindon.
Cavendish Bars, which is led by Christian Arden, the founder of the Po Na Na chain, was formed in April 2008 to operate 26 sites formerly run by Luminar, the national nightclub operator.
Cavendish plans to rebrand the Walkabouts and the bars will be added to the trading company and will benefit from substantial capex. Further opportunities are being pursued. Coffer Corporate Leisure acted for Cavendish Bars.
PREPARING A GROUP FOR SALE
- Prepare an information memorandum that is easy for prospective buyers to understand. Include everything that will enable a buyer to make a decision - full trading accounts of at least three years, property rights and a full profile of the management team.
- Present the business in the best possible light but do not omit the downsides. If there is a break clause in a lease, for example, there is no point hiding it because it will be discovered in the due diligence process. Be straightforward and the sale process will be smoother.
- Do not advertise. Keep the sale confidential. Appoint an advisor who knows the market and who can quietly approach prospective trade buyers, private equity groups and private investors.
- Do not accept the first offer that comes along. Run a discreet, structured auction process with a closing date if necessary.
- Once you have selected the buyer, act quickly to complete the sale.