No Pain No Gain: Restaurant chain a bland choice for hungry investors

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The Independent Online

Prezzo, the Italian restaurant chain that once graced the No Pain, No Gain portfolio, is feeling the bitter bite of the credit crunch. Although the likes of the Restaurant Group and JD Wetherspoon have managed to serve up relatively robust trading dishes, the pasta and pizza business has acquired a lean and hungry look.

Half-year sales, helped by new openings, rose from £32.5m to £41.4m, but pre-tax profit tumbled from £4.7m to £2.9m. True, an impairment charge for four underperforming restaurants did much of the damage, but there is little doubt that Prezzo is finding the going increasingly difficult. Indeed, the company complains that the six months to end June "provided some of the most challenging trading conditions" it has experienced since its foundation eight years ago. And the trading atmosphere has not improved since June.

It now operates from 138 sites, but because of the "uncertain economic climate" the roll-out programme has been cut back.

At 29p, the group's shares are around their year's low point. Only the possibility of a takeover prevents them falling further.

The portfolio arrived at the equivalent of 17.25p. The shares subsequently approached 100p. Then the impact of the credit crisis started to ravage high flying hospitality shares. The portfolio sold at 60p, notching a nice little profit. Even so, I could not help thinking that I sacrificed too much of the gain by not displaying a little more alertness.

Not surprisingly, Prezzo's unimpressive interim figures have prompted analysts to pull back the year's expectations. The group was quick to point out that adjusted pre-tax profit rose by 8.8 per cent to £5.2m. But even that figure was below stock market predictions.

With the group feeling the pinch, profit downgrades were on order with the year's forecasts cut back to less than £11m. Last year's "true" pre-tax profit was £7.7m, down from £8.7m.

The Prezzo display looks even more depressing when viewed against The Restaurant Group, the Frankie & Benny's chain, and Wetherspoon, the pub group where food accounts for around a third of sales. Restaurant Group increased first-half profit substantially and made confident noises about progress in its second six months. And Wetherspoon, although posting lower year's results, sweetened the pill by reporting it had enjoyed its busiest ever August.

The Italian food chain is a creation of the Kaye family, which has an enviable record in developing successful eating-out themes. I first came across the Kayes in the 1960s when they floated a restaurant business called The Golden Egg. I doubt if such a venture would go down well in today's more fastidious and health conscious climate, but what was effectively a chain of up-market greasy spoons was sold off at a handsome profit. Since then, various successful concepts, such as Ask and Garfunkel's, have appeared. Invariably they have been absorbed by takeover marauders with the Kayes pocketing rich rewards.

Besides Prezzo, the family is deeply involved in one other quoted eating out spread: Tasty, specialising in Asian food. But there is a chance that Prezzo's shares could soon be removed from the stock market. Back in May, the company admitted that it had received a takeover approach. It came from "certain members of its board". Presumably, the Kaye family, which controls the enterprise, was intent on taking the chain private.

Talks are, however, taking an awful long time to reach a conclusion. Last week, it said discussions to put together a bid package were ongoing. Raising the cash, no matter how powerful the borrowers, cannot have become easier since the May statement. At 29p, the group is capitalised at around £65m.

Takeover talks have been known to stretch over long periods. But the Prezzo jaw-jaw is looking increasingly forlorn. Indeed, stockbroker Investec Securities has gone on record as saying: "It appears increasingly unlikely that the expected takeover offer will materialise."

With the share price declining and prospects looking less appetising, the case for mounting a bid – and probably taking on substantial borrowings – must look less compelling to the would-be bidders. And if raising the cash is becoming more difficult, I, like Investec, would not be surprised if Prezzo soldiers on as a quoted company. Whatever happens, the portfolio was right to sell. I doubt if any bid will top its 60p selling price.

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