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Gondola offers investors a restaurant ride

26 October 2005

The formal announcement that Gondola, the holding company behind PizzaExpress and Ask, is to seek a listing on the London Stock Exchange next month is welcome news for the UK chain restaurant industry.

The company, with an economic value approaching £900m, will become the biggest listed restaurant chain in the UK, about three times bigger than its nearest rival, the Restaurant Group.

The flotation follows the debut of La Tasca onto the Alternative Investment Market in February of this year. Still to come perhaps are Carluccio's, the eponymous chain of Italian restaurant and retail outlets, and Tragus, the operator of Café Rouge.

But Gondola is by far the most significant because its size means it will attract the attention of a wider and deeper pool of investors. The resulting increase in attention paid to Gondola will mean that other companies will not have to start from scratch to make would-be investors understand their business models.

TDR and Capricorn paid just £278m for Pizza Express in 2003 and the following year a further £213m to buy Ask Central, the owner of the Ask and Zizzi chains. Since these acquisitions, a handful of restaurants have been opened but not nearly enough to justify the £400m difference in valuation if the economic value on flotation does get close to the speculated £900m.

The other thing that makes the listing of Gondola interesting is the relative weakness of its growth story. The company believes it can add between 25 and 30 restaurants a year. But when you have almost 500 already, these are not very racy numbers, little more than 5%.

In contrast, Gondola's smaller quoted rivals, La Tasca and the Restaurant Group, are delivering growth in the double digits, about 10% and 20% respectively.

Opening new restaurants is not everything, especially in a company-operated environment rather than franchising, but it is hard to see much more being squeezed out of the existing outlets in terms of like-for-like sales or increased profitability.

Like-for-like sales at Gondola were up 6.9% for the year to 26 June. But in the 16 weeks to 16 October, this had fallen to 3.2%. While the London bombings would have contributed to this decline, it is clearly a difficult time to bring a restaurant chain to the market.

If the float succeeds - and most City watchers are betting it will - it will be a vote of confidence in the long-term financial prospects of the restaurant industry as a whole.

By Andrew Sangster

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