Why pub and restaurant chains remain in private hands

Forbes Mutch, editor-in-chief of Chain Leader UK, looks at why the expected "flotation fever" has failed to materialise

2005 began with the news that Spanish tapas bar chain La Tasca had hired Altium Capital as its advisor in a bid to float the company on the Alternative Investment Market (AIM).

Many UK branded restaurant and bar groups sat up and took note and, when the flotation went ahead in February for £54m, it looked as if it might start a march on the stock market by operators in the chain sector.

Not so. Four months later, the Stock Exchange is still waiting for the doorbell to ring.

In recent times, more pub and restaurant operators have gone private or been taken over than have gone to the stock market.

In fact, in the past two years, only Clapham House, run by former PizzaExpress chief executive David Page, and Urban Dining have floated successfully.

Clapham House achieved an AIM listing in November 2003, raising £14.75m at 100p.

It acquired the Real Greek and Bombay Bicycle Club chains before a secondary AIM placing in June 2004, when it raised £7m at 140p, allowing it to buy Gourmet Burger Kitchen.

Urban Dining was launched in May 2004 by Page's erstwhile PizzaExpress colleagues John Metcalf and Glen Tomlinson, who raised enough cash with an AIM listing to purchase burger chain Tootsies for £31m.

The company has since looked at other possible acquisitions but, according to Tomlinson, has been put off by "unrealistic price expectations".

This may be a clue as to why restaurant and bar chains are put off going down the flotation route.

For years, the hospitality industry has felt that City analysts fail to understand catering operations, placing too much emphasis on capital assets (the bricks and mortar) and not enough on the total operation.

The result is that operators usually value their businesses at about 20% higher than market commentators and this disparity often gets in the way of a flotation.

In August last year, for example, Graphite Capital, the major shareholder and long-term supporter of Wagamama, gave up trying to float the noodle bar chain after deals with venture capitalists Hutton Collins and Apax Partners collapsed.

Graphite subsequently invested £13m of its own money in Wagamama to finance expansion plans and it is now thought that the chain will become the subject of a trade sale instead.

On the pub side of the sector, the big flotation long expected is that of Spirit Group, which made its intentions known when it acquired Scottish & Newcastle retail in 2003.

With Sprit valued at more than £2b, this has been dubbed the "super float" of the year.

But it still looks a long way off. The pub company's operating profit margin fell from 34.4% last year to 31.7% in the first six months of its current financial year and City analysts are now suggesting that the flotation won't happen until 2006.

Barracuda, owner of pub chains Smith & Jones, Varsity and Barracuda Bar, has also been tipped for an AIM listing this year, but again appears to be in no hurry.

So, despite the high expectations of flotation fever breaking out in the chain sector earlier this year, it is beginning to look as if it was a false dawn.

City investors look on, maybe rubbing their hands at the prospects of the Capital Pub Company or PizzaExpress coming their way (both strong rumours) but, for the time being, it continues to be a case of "watch this space".