FL Group quits £450m auction for Pret A Manger

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The private equity firms Lion Capital and Bridgepoint Capital are in a two-horse race to buy Pret a Manger after a third bidder dropped out of the running for the boxed sandwich maker.

FL Group, the Icelandic investment group, is understood to have withdrawn from the sale process, according to sources close to the situation. It is unclear why FL gave up, though the prospective prices of up to £450m for the company are "absolutely astounding," according to a source who looked at the business.

At anywhere near that price a sale will represent a massive payday for its founders Sinclair Beecham and Julian Metcalfe, who started the company in 1986. It would also mean a healthy return for McDonald's. The burger giant bought one-third of the group for £50m in 2001, implying a value of about £150m. The auction is being run by the investment bank Rothschild.

Bidders were granted full due diligence access to the company this week after tabling a round of initial bids. Sources involved in the situation said that a winner is likely to be chosen within the next month.

The company has about 150 stores, as well as locations in Hong Kong and New York. If it goes for £450m, that would equate to about £3m per store.

When restaurant group Tragus bought Strada, the Italian restaurant chain, for £140m in May, the per site rate was about £2.4m. "These are metrics we have not seen before," said a source.

Because of the high volume nature of Pret's business and the lack of a central kitchen that some food businesses rely on, the company can be seen as a retailing business rather than a restaurant group. This would imply a different set of valuation criteria, sources said.

There are also questions, however, around how fast the company can continue to grow. Three-quarters of its stores are in London, which provides the very high levels of customer traffic necessary to keep food wastage low. Outside major metropolitan areas, the dynamics of the business are less clear, sources said.

The competition between Bridgepoint and Lion is a repeat of the auction for Fat Face, the clothing company. Rothschild ran that auction as well, with the final round also coming down to the two firms. Bridgepoint won with a £360m bid that raised eyebrows among rival private equity firms that saw it as very generous.

"Once again you have a Rothschild running the auction, and these two bidders who will pay up for an asset," a source said.

Financing is not expected to be problematic, as mid-market deals have not been as adversely affected by the global credit crunch as large deals have at the top end of the market.