Restaurants take AIM

Running restaurants was something chefs traditionally did because they wanted to be their own boss or simply because they had an entrepreneurial streak. No longer. The last couple of years have seen a slew of restaurant businesses launching on the stock market, and at healthy prices.

In the last part of 2005 alone we saw Gondola Holdings, the owner of Ask, Zizzi and PizzaExpress, float on the Alternative Investment Market (AIM), followed soon afterwards by Carluccio's, the chain of Italian café-cum-delis backed by Priscilla and Antonio Carluccio, valued at £53.6m.

Earlier, in February, La Tasca also floated on AIM valued at £54m, followed by Fishworks in June at £10.7m. And, preceding last year's activity, you only have to look at the likes of Clapham House (floated November 2003) and Prezzo (2002) to see a pattern emerging. The question though, is why now?

Less vulnerable
One reason is that eating out has become so ingrained in the national consciousness that it's considered less vulnerable to economic ups and downs, says Jon Lake, director of corporate finance at Deloitte.

Paul Hickman, analyst at KBC Peel Hunt, argues that other segments in the leisure sector are more volatile. Pubs and bars, for obvious licensing laws reasons, are looking less of a safe bet than they once were, ditto brewing.

Meanwhile, the hotel and tourism sector is not only mature, but remains vulnerable to one-off economic shocks such as terrorist attacks. "Within the restaurant subsector there's the opportunity for proper growth, particularly within smaller companies," Hickman argues.

Another underlying reason, suggests Lake, has been the arrival of private equity groups over the past five years. While such companies have brought much-needed capital, private equity by its nature is restless - investing, cashing in and moving on - often in a cycle of about five years.

"At the end of the day they will be seeking an exit," says Lake, with flotation often looked upon favourably.

In the case of Carluccio's, the decision to float was guided by the fact that its private equity backers were looking for less commitment and that the Carluccios themselves were now in their seventies and looking to step back, explains managing director Simon Kossoff.

"We wanted the greater flexibility that comes with flotation - that's really why we're doing it," says Kossoff. "It's not driven by raising money."

The last time the City got excited about restaurants was in the mid-1990s, when a lot of investors got their fingers burned. But the market seems to have grown up since then.

"There's increasing maturity in the market and a better understanding by investors," argues Hickman, adding that it would take overheating or a period of great uncertainty to dent the sector's popularity. "But I don't think there's a danger of that," he adds.

Earnings growth
But there are pros and cons to floating. Benefits include access to greater capital and, potentially, a more sustained path of earnings growth as a result. However, downsides can mean loss of control, being beholden to short-termist shareholder pressure, extra bureaucracy, tighter financial governance controls and the danger of simply hitting the market as it cools.

Less hands-on ownership can cut both ways, suggests James Horler, chief executive of La Tasca. "You're bringing in people who are able to offer another opinion. If you're open to that it can be a good thing," he says.

Kossoff, Horler, Lake and Hickman all suggest that 20-30 units is probably the smallest you should be before considering flotation.

Hickman says: "When you get to about 30 restaurants it becomes a completely different sort of business. It's quite important that getting from five to 30 is not combined with the pressures of being a publicly quoted company. Once you're quoted, you need to spend a lot of time looking after your investors."

Springboard to buy
It's also important to remember that a decision to float doesn't always work out as planned. When Urban Dining, the financial shell behind the Tootsies brand, came to the market in May 2004, the plan was to use the flotation as a springboard to acquisition, particularly of other restaurant groups, says finance director Tim Woodcock. It bought Tootsies in November that year, but since then no further opportunities have arisen at the right price. The company's lack of growth is in stark contrast to the success of competitor Clapham House Group.

Urban Dining is now reconsidering its position. Options include returning to private hands, being bought by another plc or simply carrying on trading as Tootsies, either privately or as a plc.

"It's a lot more short-term in the public arena and it's much harder to plan your business five years ahead," says Woodcock. "You're much more in the glare of the spotlight."