Today’s news that Britsh pubs small cap City Pub Group PLC (AIM:CPC) will be acquired by Youngs didn’t happen in a bubble. Not by any stretch of the imagination.
Rather, it forms part of an emerging groundswell of takeovers and consolidations in the embattled hospitality sector.
One month ago, The Restaurant Group PLC (LSE:RTN), proud owner of casual Japanese restaurant chain Wagamama, agreed to be bought out by US private equity firm Apollo Global Management (NYSE:APO).
Back in April, Fulham Shore, owner of popular pizza chain Franco Manca (as well as The Real Greek) agreed to be bought out by Japanese firm Toridoll.
Though not strictly a hospitality play, or even a hotel despite the name, we can also through US confectionery conglomerate Mars’ “knock-out bid” for Hotel Chocolat Group PLC (AIM:HOTC) to the pile.
All of the above takeover bids came with healthy premiums (more than 160% in Hotel Chocolat’s case), suggesting that the private market senses value in these chains where the public markets do not.
It is easy to see why the market has undervalued hospitality of late.
Soaring inflation has thinned the sector’s already razor-thin margins while the rate of progress in the post-COVID-19 recovery has been debatable. Rising staffing costs have added fuel to the bear case.
But while the macro environment has certainly not swayed in the hospitality sector’s favour, “the absurdity of UK small cap valuations”, as Crystal Amber’s Richard Bernstein today called them, is far from a hospitality issue alone.
As previously written in Proactive, private equity takeovers in the UK biotech space have grown as long as an NHS waiting list.
They also came with substantial premiums to what the Square Mile valued them at. Small-cap sitting ducks are evidently migrating across multiple sector lines.
The absurdity of UK small cap valuations demonstrated again today with Mars bidding 375p cash against last night's closing price of 140p. If Mars thinks the business is worth 375p, it is. So many other sitting ducks.https://t.co/LgMdigdYlk
— Richard Bernstein (@CrystalAmberRB1) November 16, 2023
Though the core reasons may differ from the biotech space, the recent uptick in hospo takeovers points to the same issue: The capital markets are consistently undervaluing Britain’s small-to-mid caps.
Expect more consolidation in the hospo sector to come.