The biggest news in the leisure sector in 2005 surrounded the deals that didn’t happen. As 2006 progresses, speculation continues to centre on a number of UK-listed conglomerates that look ripe to be dragged private, knocked into shape and relisted. Add to this any number of secondary buyouts that are expected to come into play and the rapid growth looks set to continue.
Buyout activity in the leisure sector has been strong over the past three years, with growth up by 30% in 2003 and 18% in 2004 and 2005. The pace of deals will accelerate further if buyout houses finally get their hands on the coveted assets of conglomerates such as Rank, Whitbread, Hilton and DeVere.
In the cases of Whitbread and Rank, which are seen as the most likely candidates for a break-up, there are some choice assets in the private equity sweet spot. Rank owns Mecca Bingo and the Hard Rock Cafe as well as a hotel franchise; Whitbread comprises Premier Travel Inn, Brewers Fayre and Beefeater; TGI Friday’s, Costa Coffee, David Lloyd Leisure, and Pizza Hut.
A cursory look through the world of private equity-backed leisure companies indicates that many of these are reaching their natural maturity and should also fuel the 2006 deal pipeline. Especially notable are investments in health clubs such as Shearings (CVC 1997), Holmes Place (Bridgepoint/Permira 2003), Cannons (RBS 2001), and Next Generation (Bridgepoint 2002).
Other investments in the sector that are likely to be put on the block sooner rather than later include Travelsphere, (Hg Capital 2000), Q Hotels (Alchemy 2003), Gala (Candover, Cinven March 2003), First Motorway Services (3i 1996), Vue Cinemas (L&G 2003); Travelodge & Little Chef (Permira 2003) and Principal Hotels (Nomura 2001).
However, the boldness with which private equity investors are pouring into leisure seems at odds with depressed consumer confidence and the closely related retail sector. While there are differences, and sub-sectors such as restaurants appear to be weathering the consumer downturn, the success of the two is clearly linked to consumer spending.
In the UK, the outlook looks bleak, with muted wage inflation, rising unemployment, spiralling debt levels and stagnant house prices. For the first time, consumer debt is higher than annual economic output. According to the office for national statistics, growth in the retail sector is at the lowest since records began in 1945. Despite the grim experiences of buyout houses in the retail sector, there seems to be no let-up in leisure investing.
Are private equity houses calling the bottom of the consumer confidence cycle or do they expect a continued resilience among leisure companies? Whatever way you look at it, this is not an easily defensible bet – for every Wagamama there are a hundred other restaurant concepts that fall foul of the whim of the consumer.