Compass turns up the heat

BLUE CHIP: The contract caterer is paying a high price for expansion, but its latest acquisition should blend in well

NEXT time you polish off a profiterole at one of the summer season's big events, or more prosaically, a shepherd's pie in your staff canteen, spare a thought for where it came from. The chances are high that it was supplied by the contract catering company Compass.

Contract catering might not set your heart racing, but food is big business and contract catering has explosive growth potential. In 1994, it was worth an estimated pounds 45bn in the UK and the US and another pounds 39bn in Europe.

Compass Contract Services is a major player. Its New Famous Foods operates many franchises for Burger King, Pizza Hut, Dixie's Doughnuts and Le Croissant. It also supplies meals to schools, hospitals, offices and airports as well as a large chunk of the ubiquitous salmon and profiterole catering circuit of corporate hospitality.

The group's latest acquisition, Eurest International, from one of the world's leading hotel and catering companies, the French-owned Accor, for pounds 589m should prove a turning point for the company.

The deal, announced last week after a leak in the French press, makes Compass the third-largest catering company in the world. The big question is whether the company has paid too much for its move into the big time.

Francis McKay, chief executive of Compass, insists not. He says the Eurest deal is the "last major piece in the jigsaw" for the group, but does not rule out smaller acquisitions and insists that "bedding down is now the order of the day".

Of the pounds 589m Compass paid for Eurest and its 33 per cent-owned affiliate Eurest France, pounds 308m is being funded by an underwritten bank facility, allaying market fears that a rights issue would be necessary. The rest is made up from an issue of 77.6 million new shares to Accor, which gives the French group a 22.5 per cent stake in Compass and two non-executive seats on the board.

It is this stake that worries analysts, as they fear Accor could lead Compass astray from its clear branding strategy in known markets, although Mr McKay points out that the deal took a year to negotiate because of Compass's demand for independence.

Accor, he said, was looking for a long-term earnings stream, and Compass is keen to learn from Accor's Asian and South American experiences.

Compass began life as the catering arm of Grand Metropolitan but was spun off in 1987 in a pounds 160m management buyout. It was floated in 1988 at a restated 243p a share and is now worth 377p a share.

Familiar brands include Eatons wine bars and the Roux Fine Dining operation, sponsored by the enigmatic French chef Albert Roux, which provides upmarket dining in City establishments such as the London Underwriting Centre.

The Eurest acquisition gives Compass instant access to markets where the group had no great presence. Accor has operations in 132 countries, employs 46,000 people and provides 2 million meals a day through 4,700 restaurants. The sale to Compass enables it to stay in the catering market and benefit from the relationship. Compass will benefit from potential contracts with Accor's 2,265 hotels.

The deal is the third for Compass in as many years. In April 1994, it bought the US Canteen Corporation for pounds 311.7m, partly funded with a pounds 145.9m rights issue, which made it the third-biggest operator in the US. And in May 1993, a rights issue of pounds 86.6m was used to partly fund the purchase of SAS Service Partner. The market remains critical of the group's speedy expansion and reacted to the Eurest deal by pushing the shares down 27p to 345p, a drop of 7 per cent. But shares bounced back once analysts had absorbed the strategic fit of the two operations, and the absence of a rights issue helped the price to 377p by the end of last week.

Even though the Eurest deal is expensive, there is little doubt about the good fit. Compass was already strong in the US, UK and Scandinavia, but lacked presence in Germany, Spain and France. Both groups were running into each other as Compass began to fulfil its strategy of competing for contracts in Europe. In catering, margins improve with volumes, as econ- omies of scale count. And international clients in one country can be recruited in others. Compass clients include Citibank,, Ford and Procter & Gamble.

The Canteen operation seems to have been successfully absorbed into Compass, but it is an entirely different animal and therefore difficult to compare with the latest addition.

As companies continue to hand their canteens to specialists, Compass looks well placed to take advantage of organic growth. Once the company shows it can bed in Eurest, its shares will be more attractive.