During the pandemic the focus for operators and investors has, unsurprisingly, been on safeguarding the future of their businesses and ensuring they are appropriately funded to weather the storm. However, as businesses start to re-open and we begin to approach normality, investors are turning attention to what the winning concepts might be in a post-Covid world.

This was brought into sharp focus by EG Group’s acquisition of Leon announced this week for a reported £80-£100m – a clear vote of confidence in the future prospects of the sector and the level of pent-up consumer demand.

The transaction also points to the trend of fuel forecourt owners looking to an electrified future, and investing in foodservice propositions that can serve customers with a 10-15 minute dwell time for a fast recharge – Leon has already proved itself in the transport hub and motorway service station environment, so it is well placed to serve this new foodservice occasion.

But how do we expect the M&A market to bounce back? Looking forward into the rest of the year and beyond, we expect transactional activity to pick up again once the sector reopens and more mainstream investors get comfortable with the medium-term trading prospects. What is beyond doubt is that the pandemic has led to many businesses adapting for the better, offering the potential to drive even stronger operations in the ‘new normal’ – which is attractive to buyers and investors.

We all hope that after a second half of 2021 focused on recovery, next year we could, with a fair wind, get back to pre-Covid trading levels (or even above in some cases). As Robin Rowland, operating partner at investment firm TriSpan, the backer of Rosa’s Thai and Thunderbird, said in Propel recently, we are entering a new phase where businesses need not just “survival capital” but also “development capital”.

With that in mind, we see three major investment themes playing out.

1. Balance sheet rebuilding: 
With the majority of the sector weighed down by debt taken on in order to survive the shutdown period (bank borrowing, creditor deferrals, rent deferrals etc), for some businesses the next 12 to 24 months will be about rebuilding balance sheets and clearing arrears. Companies may currently have low or no equity value and be unwilling to dilute their equity position further or take on more debt. This will leave little free cash flow to expand as this will be diverted to paying down debts and liabilities. Some companies will likely bide their time before returning to significant expansion, with the balance sheet in a better state.

2. Buy and build platforms:
With the licensed leisure market still highly fragmented, a buy and build strategy can take advantage of this and boost margins with cost synergies and the benefits of scale. The likes of Epiris (The Big Table Group), Towerbrook (Azzurri Group) and Partners Group (Cote) have acquired businesses that look likely to act as platforms for further consolidation. They have experienced management teams in place, access to capital and can leverage infrastructure to add new brands or groups of sites. These scalable platforms are particularly in demand in the pub sector, with real estate funds, many of them US based, targeting this sector as part of an operational real estate investment strategy. We have seen this recently with Oaktree backing Rooney Anand and the RedCat investment vehicle to acquire a package of pubs from Stonegate. We expect more to follow.

3. Leading lights:
These are the leading brands in their cuisine areas which pre-COVID may not have been available to acquire or invest in. They now may be in-play as shareholder’s objectives change or they see significant future growth opportunities that require access to larger pools of capital. These deals will likely require the incoming investor to pay tomorrow’s price today in order to secure the deal. This can still make sense though, due to the potential to achieve outsized returns in a disrupted market with supportive property conditions. EG’s acquisition of Leon, and Imbiba’s recent investment of £3.5m into Pizza Pilgrims to aid its roll-out plans are good examples of this theme. With access to funding, these businesses will expand and cement their leading positions in their markets.

In our experience, there are certain additional areas that buyers and investors are focusing on when evaluating a business, post-Covid:

  • How has the business traded during the pandemic? An ability to drive profitability during more challenging trading periods helps build confidence on the resilience of the offer.
  • How has the business evolved during the pandemic, and what steps have management taken? For many, operations are now stronger than they were before.
  • Can you trade multi-channel effectively? Delivery is here to stay, as is the need for an effective digital presence (and for some brands, meal kits and other channels have also been developed).
  • How have your roll-out plans changed? What is now the view on what constitutes an ‘ideal’ site for expansion? Can the roll-out plan be flexed between city centre or more suburban locations, for example, as consumer demand patterns become clearer?
  • How has the business adopted digital tools and integrated these into its operating model?

A final point – and while this may seem fairly obvious – is that operators must be able to articulate the story of their business and the future opportunity. Of course, the immediate focus will be on keeping your head above water, but when conversations with would-be investors do occur, it’s critical to be able to tell the story of surviving the toughest period in the sector’s history and how you can take advantage of the opportunity to grow as the market bounces back. It could be the difference between securing new investment or being left on the shelf.

An earlier version of this article (prior to the announcement of the Leon deal) was previously published in Propel 

Graeme Smith and Craig Rachel are corporate finance specialists in the Hospitality & Leisure team at AlixPartners