Compass sale opens way for £300m buyback
Thursday 19 December 2002
Compass, the catering giant, is to repurchase up to £300m of its stock after clinching the sale of its Little Chef and Travelodge chains to Permira, the private equity house, for £712m.
The company, which put the business up for sale in June, said the share buyback programme would not start before the deal closed in January.
Analysts said the price was fair given the deteriorating outlook for the fast food sector. The two businesses were originally valued at between £600m and £750m. Last week, Diageo was forced to accept a knock-down price for Burger King and stump up cash to help the US buyer fund the purchase. But shares in Compass fell 12.75p to 317.5p, reflecting market disappointment that the buyback programme was not bigger.
Mike Bailey, the chief executive, said the buyback level reflected "a balance between our debt and the purchase price. We wanted to keep our BBB+ rating, for which we need five times interest cover". The remainder of the cash proceeds will be used to slash £400m off the group's £2.7bn debt pile, he added.
Compass is keeping its Moto motorway service areas but will otherwise be a focused food service and vending group. It owns brands such as Upper Crust, Caffè Ritazza, Au Bon Pain and Harry Ramsden's. Compass intends to expand Moto into Italy and hopes that a plan to open mini-supermarkets in its UK service stations will prove successful.
Mr Bailey said he was "very pleased" that Little Chef and Travelodge had gone to one buyer. "It made life an awful lot easier", he said, because more than 100 of the hotels are on Little Chef sites. He attributed the delay to announcing the sale – it had been widely expected earlier this month – to the "complexity of the deal".
Under the agreement struck, the two parties have entered into arms-length franchise agreements that will allow Compass to continue using Little Chef in its Moto outlets, while Permira will still use the group's Harry Ramsden's fish and chip outlets in Little Chef. "We will pay each other a percentage-related franchise fee," Mr Bailey said.
Permira, formerly called Schroder Ventures, said it would press ahead with plans already under way by Compass to upgrade Little Chef's image from that of Seventies-style roadside "caff" to a more exclusive dining experience. It said there was scope to grow Travelodge, which operates at the budget end of the market, organically, and that it would not be looking for any bolt-on acquisitions.
Analysts said Compass's move should increase its stock market appeal. Mr Bailey added: "I'd like to think it will improve [our stock market rating]. Clearly it is a much more focused company. The market has liked that historically."
Travelodge and Little Chef had sales of £368m in the year to end-September and contributed £105m to Compass's operating profit.
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