Opportunities for Leisure and Hospitality businesses on the capital markets

“Opportunities for Leisure and Hospitality on the capital markets - the window is open”

By David Roberts,

Head of Leisure Sector and Corporate Partner, CMS

(19 March 2021)

For many businesses in the leisure and hospitality sector at present, it’s hard to get excited about the state of play, let alone think opportunistically.

Pubs, bars, clubs, hotels, and restaurants are closed and will remain closed for a few more months. Sector players have accumulated deferred rent and tax liabilities that will take literally years to shift. Groups with previously immaculate balance sheets now find themselves saddled with CBILS and future fund debt and there is great uncertainty about the viability of many key players; having already lost some grand old dames on the way. 

Worse still, the traditional funders of growth in the sector, private equity, is shying away from the sector as their investors need them to tidy up their existing exposure (read, CVA, shut down, liquidations and restructures) before they wade back in, meaning perhaps a dearth of deal activity for the foreseeable future.

Where is the opportunity then?

Despite this reasonably grim reality, I can report that interest in the sector is definitely coming from a part of the market that has always coveted the leisure sector, that regularly often bemoans the lack of listed product and is now very open to increasing its exposure, namely .... the capital markets.

Institutional investors are now actively calling their brokers and requesting they deliver them exposure to the leisure and hospitality sector. There is thus a window that is now open (for how long, no one knows) where investors are willing to bet that we are on the precipice of a recovery, bringing with it a repeat of the “Roaring 20’s” of a century ago and with it, the prospects that investors dream of, getting in on the ground floor of a surge in growth.

Never was pent up demand more evident when industry debutant Nightcap Plc released an announcement on 9 February 2021 (three weeks after it debuted on the market) stating that it honestly had no idea why its share price had tripled. I would guess, and I stress this is my guess, that this is nothing more than evidence of the desire for institutional investors to get exposure to our sector.

Should I list?

The listed environment has not been the traditional home of the smaller casual dining restaurants or bars and the like. Thus, there is much for the sector to learn about the advantages and disadvantages of being listed and the costs and risks associated with it. That is a different article I am afraid.

For now, it’s important to note that key to some will be the fact that:

·      listing provides an exit for founders who can sell their shares and take cash and listed shares as consideration, meaning that their “roll over” shares are liquid and readily saleable going forward (after an agreed lock-in);

·      listing allows a company to come back to the market time and time again to raise further capital meaning that there is access to growth capital;

·      listing on AIM requires each candidate to appoint a nominated adviser (or “nomad”) who effectively becomes your corporate finance adviser and helps to ensure that you continue to adhere to the AIM rules and to help you to navigate the listed environment and grow;

·      listing requires a business to put in place high standards of financial reporting and discipline and can help to really improve the quality of a business and its leadership; and

·      listing can deliver valuations that are often higher than the values ascribed by private equity, which explains why, and we are seeing this now across Europe, private equity seeks to sell on a “dual track” basis, where they pursue a listing as well as a private secondary sale and see what generates the most value.

This begs the question of where to list and who should list.

Where to list?

Now, the option for smaller companies appears at the moment to be the AIM market, the junior market of the London Stock Exchange. 

Groups like Nightcap Plc, which acquired London Cocktail Club on listing, Hugh Osmond’s Various Eateries Plc (which debuted with Coppa Club and Tavolino), Alex Riley’s Loungers Plc have all listed on AIM. David Page’s Fulham Shore Plc is now also AIM listed as well, having initially listed on the ISDX.

There is thus a presumption that existing groups seeking a listing will follow and go on to AIM; after all, AIM is a growth market and it allows management teams to come back to the market time and time again to fund growth. Note that AIM requires three years of audited accounts so this may lead to a flurry of businesses seeking to get their historic accounts audited.

Other more opportunistic types may seek an alternative route and consider a standard listing on the main market (where no such audited accounts rule exists) and, in so doing, create a special purpose acquisition company, or SPAC.  A SPAC raises capital and joins the listed environment with a founding team that nominate that they will be looking to acquire, for instance, casual dining restaurant groups in distress, or perhaps that they want to acquire and then incubate the next generation of talent in the space. 

Fulham Shore Plc began as a SPAC listed by David Page and others in 2013, which followed up with acquisitions of Franco Manca and The Real Greek.

AIM does not actively promote itself anymore as a friendly space for SPACs and has changed its regulations to make AIM a less attractive place for SPACs, leading to many choosing the (arguably easier and lighter touch regulation) standard listing pathway or other more open markets, such as Amsterdam and the US.

 Who should list?

It really depends. Some might argue the perfect candidate to list is a mature business with an established presence, known brand and strong history of earnings. I can think of a few of these, but these have not been, traditionally, the businesses that have listed but if PE are not buyers at present, this may be their only option.

In my mind, the perfect target to take advantage of this very small window are smaller groups that have not been heavily exposed to the ravages of the property market and more importantly, are able to show, great 2019 EBITDA, positive trading when open during the pandemic, a pivot from bricks and mortar sales to delivery, at home, retail during lockdown as well as a capable and investor friendly frontperson who will be the public face of the business.

In other words, the sort of businesses that venture capital and private equity were interested in investing in pre-Covid; particularly where they have successfully pivoted to demonstrate durability, new markets and an omnichannel approach to sales.

How do you list?

 To join the capital markets, you will first need to get in touch with the broking community in the city of London or regional capitals such as Manchester. In the same way that certain PE houses have a sector focus for leisure and hospitality, so too does the broking community and thus all initial public offers (or “IPOs”) start and stop with the broker and their sales team. 

Pitch your business to the brokers, and if they like it, they will test market it to some of their friendly institutional clients and then if they green light it, sign up and get ready to meet a team of new professional advisers including lawyers, nomads, reporting accountants, financial PR specialists as well as some new non-executive directors who will be joining your board who will all pull together to prepare the relevant prospects (called the Admission Document on AIM) and get your shares admitted to trading.

In my experience, you should allow three to four months, assuming you have audited accounts and no material issues arise on the very thorough due diligence process that takes place prior to listing.

So, what will this cost?

If all goes well, the costs of the listing will be settled out of the funds raised by the IPO. Note however that, whilst some costs, particularly the brokers, will be paid on a success only basis, others will be payable regardless of success and thus there is always the risk that a failure achieve a listing can leave a business with a large bill and headache so this is not for the fainthearted. Always get a very clear view of the costs prior to starting the process.

Please get in touch with me and the team if interested as CMS has one of the leading AIM advisory practices in the country and we’d be happy to see if we can help.

David Roberts

Partner 

T +44 20 7067 3537

M +44 7540 492449

F +44 20 7367 2000

E david.roberts@cms-cmno.com

CMS Cameron McKenna Nabarro Olswang LLP | Cannon Place, 78 Cannon Street | London EC4N 6AF | United Kingdom