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ANALYSIS: Takeover activity in the restaurant sector is sending share prices soaring
September 8, 2010

The restaurant sector is suddenly starting to sizzle. After a relatively lacklustre six months, during which fears of an austerity induced consumer downturn have weighed on sentiment, a wave of takeover activity has broken out and share prices are taking off.

Late last week, Carluccio's announced a recommended 142p cash offer for its shares, which represents a 48 per cent premium to the price before the bid. This follows news at the end of July that Clapham House, owner of the Gourmet Burger Kitchen restaurant chain, had received an approach. Meanwhile, Mitchells & Butlers has raised £500m through its recent sale of non-core venues in order to expand it's Harvester and Toby branded restaurants. And Italian-style eatery Prezzo is buying 11 Caffé Uno restaurants.

This flurry of corporate activity comes against a backdrop of strong trading in the sector. Restaurant Group and Prezzo both released bumper results this week, while Whitbread, which operates a number of value restaurant brands and Costa Coffee cafes, also wowed the City with a buoyant trading update. As well as good operational management, the trading success is based on physical expansion, with cash being ploughed into new openings at a time when landlords are prepared to offer very keen deals.

According to broker Seymour Pierce, the valuation placed on Carluccio's by the recent offer - an enterprise value (market capitalisation plus debt) of 11.7 times cash profits - implies substantial potential upside in rivals' share prices. It represents 83 per cent upside for Prezzo's shares, 66 per cent for Restaurant Group, and 100 per cent for Clapham House - even after Clapham House's shares rose from 57p to 69p in the wake of its own bid approach.

But as Seymour Pierce points out, further takeovers are not a given and, even if they were, Carluccio's rivals may not command the same takeout multiples. Nevertheless, the bid does illustrate the potential value in the sector, especially if a severe austerity-driven slowdown doesn't materialise.