Pub and restaurant giants and private equity firms are circling smaller chains and vacant properties, looking to snap up expansion opportunities at a discounted price during the Covid pandemic and reap the rewards when the industry bounces back.
Merger and acquisition activity in the hospitality industry has already begun. Figures from restructuring firm Resolve showed that between September and December last year there were 28 M&A transactions in the sector, a 75 per cent jump on the previous quarter.
A number of firms have recently tapped investors for extra cash to invest in expansion, eyeing the cheap property and struggling firms that have emerged due to the devastating impact of Covid on much of the industry.
Last year Premier Inn owner Whitbread launched a £1bn rights issue to see it through the rest of the pandemic but also to help it continue its expansion plans after lockdown.
In January, JD Wetherspoon raised more than £90m through an equity placing and confirmed it was eyeing several central London properties, and considering buying pubs where it is currently a tenant and properties adjacent next to successful branches.
Private equity players are also returning to the scene, experts said, with “plenty of opportunities to choose from”.
Former Greene King boss Rooney Anand has reportedly secured £200m of investment – backed by a US private equity firm – to go on an acquisition spree, targeting smaller pubs rather than large corporate deals.
However, Anup Shah, partner at Resolve, says that despite the current trading conditions, the hospitality sector is not simply a bargain basement sale.
While the pandemic has put a chokehold on hospitality sector trading, many pub firms are preparing for a surge in pent up demand when restrictions are lifted later this year.
Pub and restaurant brands that have sufficient liquidity could hold out for higher valuations as they anticipate punters returning in hoards over the summer.
For example, London-listed Marston’s became a takeover target earlier this year but refused Platinum Equity Advisors’ £690m offer, demonstrating its confidence in the long-term value of its business and its ability to bounce back when restrictions are lifted.
Platinum Equity Advisors later shelved its takeover plan.
“I think in some ways it was quite positive because Marston’s were looking forward and feeling there was much greater potential than the offer delivered,” Shah told City A.M.
“In my experience, companies, even at the worst of times, can still negotiate from a position of power,” he said.
“In an ideal world, an approach would occur when a business has a strong capital structure, supportive stakeholders, manageable leverage, and decent trading performance.
“Within the context of Covid-19, we know that is not the case for most, especially when it comes to debt and trading volume.
“However, the buyer is seeking to acquire a company – or its asset – because there is a real business opportunity and prospect of enhanced
returns. That should never be forgotten by the target company.”
While investment into the sector is largely a positive phenomenon as it can rescue jobs that might otherwise be axed, there is a risk that UK high streets and city centres could become overwhelmed by chain pubs and restaurants – to the detriment of independents.
“There has been a trend in UK hospitality for bigger brands becoming more and more dominant because of the greater financial power they have,” Shah said.
However, the pandemic has sparked an interest in supporting local businesses and independents, which could continue after lockdowns are lifted.
On the other hand, the number of zombie companies – which make enough money to continue operating and meeting interest payments but cannot pay off their debts – is also expected to climb.
Many firms have taken on huge amounts of debt during the pandemic, such as government backed loans and rent deferrals, and do not make attractive takeover opportunities.
When the moratorium on landlords evicting commercial tenants ends there could be another surge in company collapses, according to restructuring expert Julie Palmer.
Palmer, a partner at Begbies Traynor, told City A.M, “We will see a spike in the number [of firms] showing significant distress and the number of businesses that start to fall away”.