A leisurely approach to buyouts

Following a string of private equity investments in property-backed leisure businesses, the industry is now the biggest driver of activity in the sector, according to a new report by specialist real estate lender Eurohypo.

In the report, entitled: “UK Leisure – Getting Serious?”, the German bank said that the presence of private equity firms is responsible for the increased supply of leisure-related real estate to the market, as firms either sell off assets or use them to finance acquisitions.

Since 2002, the sector has accounted for 10 percent of all UK buyouts, according to research house Mondaq. Eurohypo said that real estate has played a big part in the capital structure of these acquisitions –  either through sale and lease back transactions or by being used as collateral to increase the debt component for purchases. “This has enabled private equity investors to pay higher multiples than their listed company counterparts when acquiring property-backed assets,” it added.

Thanks to the UK’s strong economy, its open mergers and acquisitions market, and its status as a popular visitor destination, the leisure sector in Britain has become increasingly popular with foreign investment groups, as well as domestic firms. The Blackstone Group has been particularly active, buying waxwork museum operator the Tussauds Group from Dubai International Capital for £1 billion (€1.5 billion; $2 billion) earlier this year, months after snapping up the 160-chain restaurant group Tragus for £267 million in December. US firm GI Partners also crossed the Atlantic to buy Park Resorts for £440 million.

Returns have also been good. The value of Tussauds rose by 25 percent under DIC’s ownership, while a flotation of Tragus in the new year could value the business at more than £500 million, according to analysts – sources played down suggestions that this was imminent, although the firm has begun appointing banks to review strategic options for the group.

As a result, the bank believes the quest for leisure buyouts will continue – despite a lack of liquidity in the market stemming from a widespread credit crunch, it believes private equity will continue to drive consolidation in these often fragmented markets. In turn, this will continue to provide a steady stream of property assets to the investment market.

Cinemas have attracted particular interest. As much as 85 percent of cinemas are owned by just four groups, with the majority now under private equity control. Terra Firma is the largest owner of UK cinemas with 110 Odeons, while Blackstone is in the top four by virtue of the 2004 takeover of Cineworld, which went on to acquire UGC two months later. HBoS backed a management buyout of Vue Multiplexes, while the only trade presence comes from National Amusements, which owns 19 Showcase Cinemas.

The bank says all three private equity owners are planning expansion for their chains, while further consolidation is also possible. The alternative is to unlock more value from existing assets – in the case of Odeon, Terra Firma unlocked £100 million by splitting the group into an opco/ propco structure.

Restaurants have also proven popular, perhaps because they have been less expensive than other comparable assets – prices rose 4.9 percent in 2006, according to Christie & Co, compared to 8.5 percent for pubs and 13.1 percent for hotels. Eurohypo believes further consolidation is also likely in this area, as expanding brands look to expand their estates. And buyout firms are showing no sign of losing interest, judging by Cinven’s £900 million acquisition of Gondola Holdings last year.

Health clubs, casinos and theme parks have also been proving popular playgrounds for private equity. Indeed, Blackstone is now second only in size to Walt Disney, the owners of Disneyland, as the largest owner of visitor attractions in the world.