Elegant Sufficiency

Pret A Manger IPO Avoids Messy Long Lunch

High valuations and increasing pressure in key markets are good reasons to cash out now.

We are at peak sandwich.

The owner of cafe chain Pret A Manger Ltd. is considering a U.S. initial public offering later this year, Bloomberg News reported Wednesday.

It’s a good time for Bridgepoint, the group that acquired Pret in 2008, to seek an exit. It has held onto the chain for a period that's toward the longer end of the typical private equity ownership cycle.

In the U.K., Pret's biggest market, coffee and casual dining is reaching saturation point. Catering outlets have expanded aggressively, creating plentiful supply. As consumers' spending power has increased, much of that extra income has gone on experiences, such as eating out. But with wages now being squeezed by inflation, that mid-priced meal, or coffee and cake while shopping, could be the first thing to go.

Just look at Whitbread Plc-owned Costa, which recently reported a slowdown in sales.

At the same time, costs are rising for catering operators, from higher food prices to minimum wage increases.

Of course, the U.K. isn't the only game in town for Pret, which will open its 500th store this year. It has 74 outlets in the U.S., and is hoping North America can deliver significant future growth.

American Dream

The U.S. is a source of future growth for Pret A Manger

Source: Company filings

U.S. sales topped 155 million pounds ($200 million) in 2016, or 20 percent of the total 776.2 million pounds, which was up from 677.1 million pounds the year prior. Group earnings before interest, tax, depreciation and amortization jumped 11 percent to 93.2 million pounds.

A U.S. listing would raise Pret's profile there enormously, helped by a happy convergence between its investor and customer bases.

It's a bit of a snub to the London Stock Exchange, though. In the U.K., there's already an established catering sub-sector, populated by the likes of Patisserie Holdings Plc and Restaurant Group Plc.

However, as my colleague Shelly Banjo has pointed out, the catering market in the U.S. isn't looking that rosy either. Starbucks Corp. is trying to reignite same-store sales, which according to Bloomberg Intelligence are at their lowest since 2009.

No Appetite

U.S. restaurant sales have drifted down over the past year

Source: MillerPulse/Bloomberg Intelligence

Elsewhere, too much supply and not enough demand has hurt the traffic, takings and stock prices of restaurant chains. And competition is coming from cheaper rivals, such as a reinvigorated McDonald's Corp. 1

Regardless, the multiples paid in a recent crop of U.S. restaurant deals have been rising. JAB Holdings BV forked out 19 times Panera Bread Co.'s 12-month Ebitda and almost three times its revenue, making the transaction among the most expensive of its kind in the last decade.

Use-By Date

U.S. restaurant valuations remain high despite industry worries

Source: Bloomberg Intellighence

Pret may be able to avoid some of the broader industry pain by being a new, exciting brand in the U.S. Its cafes selling only vegetarian food, for example, seem just the sort of place that would appeal to millennials.

But high valuations, and increasing pressure in key markets, are good reasons to cash out now. After all, no-one likes stale bread.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. McDonald's owned a third of Pret prior to the sale to Bridgepoint.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net

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