Beat private buyers to the best deals

Kout Food Group, the Kuwaiti-based operator of multi-brand eateries, purchased the tired Little Chef portfolio and brand in April this year for £15 million from turnaround expert RCapital, beating several other buyers, and amidst fears that the multi-site roadside diner faced extinction.

The UK arm of Kout Food Group, which already operates KFC, Burger King, Pizza Hut and Maison Blanc outlets, took over management of the 83 sites and said at the time of purchase that it had “exciting plans to revitalise the Little Chef brand,” which were to involve focusing on “traditional British values”.

This was a bold move that may have seemed overambitious to some, and certainly not for the risk averse. Kout beat the likes of Costas, McDonalds and service station operators, who were also very interested in the sale, no doubt sharing RCapital’s view that the Little Chef portfolio is “one of the biggest quality estates to come to the market in recent years”.

It is thought that, had these rival buyers been successful, they would have been intent on scrapping the brand and using the real estate to increase their presence on Britain’s motorways, which would have been a safer option than Kout’s decision to build Little Chef up once more. At its peak in 1999, Little Chef had 439 outlets, by which point it had already been in operation for 41 years. Previous owner RCapital had pushed Little Chef through a vigorous restructuring after saving it from administration in 2007, which involved slashing its outlets from 234 to 83, and its workforce from 4,000 to 1,100.

KPMG, who handled the sale to Kout, would say this deal is a good example of emerging trade buyer strength and optimism to the point where serial investors now see such buyers as rivals in the race to win deals. KPMG found that more than half (56 per cent) of turnaround investors consider trade buyers to be a greater threat when seeking distressed assets than they were a year ago.

And with private equity buyers more active in the leisure industry this year, the Little Chef deal to a trade buyer would have been a real sting to the serial investor/turnaround community at large.

Business purchase figures for the first quarter this year offers statistical evidence of trade buyers’ emerging confidence. Trade buyers also paid higher premiums for acquisitions than private equity buyers did. The private company price index (showing the prices companies pay for businesses) ratio had risen to 8.5 for the first quarter in 2013 from 8.1 in Q1 2012.The index for private equity buyers on the other hand, was reduced by a third from 12.0 during Q1 of 2012 to 7.7 in Q1 in 2013.

Turnaround specialists and private equity firms, with their ready cash, business transformation skills and risk-hungry appetite, are known for being instrumental in bringing failing businesses back to a level plane, and on to profitability.
After a long hard recession and retrenchment in the M&A market, however, KPMG says it is now observing strengthened confidence and activity among trade buyers, who are looking to secure new routes to growth.

“Having battened down the hatches during the economic storm, many buyers are now sitting on significant war chests, and this renewed confidence is beginning to tempt them back on the acquisition trail,” KPMG’s Mark Firmin noted.

The accountancy firm says it is witnessing an increase in risk appetite among trade buyers, who are more interested in hedging their bets on an underperforming business than searching for a solvent opportunity to invest cash in.

Buyers have seen countless businesses fall by the wayside during the five-year recession due to funding and liquidity issues, not just poor trading, and are confident that they can address these issues themselves, making distressed purchases highly attractive.

This new boldness is riding on the back of a rise in business confidence across all industries this year as reported by BDO, along with expectations of continued economic growth this year and into 2014. The service industry in particular is growing at the quickest rate for 16 years. No doubt this is having a positive impact on trade buyer confidence.

KPMG predicts several more rescue deals from trade buyers over the next 12 months, and offered the following advice to private equity buyers aiming to beat their formidable rivals and win deals: “Focus hard on your existing core investments and look at those opportunities that can be bolted in to your portfolio most easily.”

This advice is also applicable to trade buyers: focus on your best performing operations and when searching for an insolvent, or solvent, business or assets, assess how opportunities could enhance your product and service offering and add to your asset base, to continue beating private equity buyers at their own game.

Share this article

Latest Businesses for Sale

View more businesses for sale