The Private Equity Takeover of Britain's High Street | with Boots, PizzaExpress & Starbucks

0:01This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required, compatibility and availability varies 18+. Hello and welcome back to the Market Maker podcast and this week we're taking a tour of the high streets. We're going to start the day with an iced pecan crunch latte from Starbucks maybe with a cheeky side order of burritos before popping into boots for some toothpaste and shower gel.

0:44Going to have lunch at Pizza Express going light of course on the dough balls before ending up in everyone's favourite mine included on the way back from Greg's. I always have a little stop off at Poundland. That's not a joke. That's reality of my life as a young father. The headlines from the last few years make obviously for some pretty grim reading when we talk about the high street stories of bankruptcies, takeovers, restructuring, store closures. We're going to dive into all of this, focusing on some of the biggest stories of the week. However, before we begin, something that caught my eye, Stephen, a little bit related to your old stomping ground.

1:24Did you read about Joseph Malloy, head of passive equity at HSBC Asset Management, who was barred by the FCA for evading almost£6 ,000 of train fares? Did you read that one in the FT? I did. I did. It was one of the most wonderful stories. Here's a bloke who lives in a two million pound house somewhere in the home counties. And his scam, bearing in mind, you know, he's probably getting a bonus, six figure bonus, I reckon, head of passive equity at HSBC asset management is getting. His scam, over a period of a number of years, he did a thing on his daily commute to and from Orpington station. He did a thing called donutting.

2:13have you ever donutted and you know what it means uh i've heard of donutting but not in the context of dodging train fares so what he would do this guy who clearly has better things to do with his time he would buy two singles one at the beginning of the trip the shortest journey possible let's say orpington to x four pounds and then one at the end of the trip you know x to london bridge for another four quid and save the total train fare by doughnutting so he could scan in and scan out at the end the funny thing is though my train goes through orpington so if you you know shout out south london crew but he goes for orpington's like literally i don't know 18 minutes 20 minutes something straight i mean it ain't far from london to be fair this has got to be pathological going on there yeah this has got to be pathological because you know i remember being a broke student and you know reusing a bus fare or something like that right and thinking gosh i needed that because i'm broke but this guy is not broke and he's only 53 so he's not you know he's not a retirement age and he gets barred for life.

3:33The FCA saying that he shows he lacks honesty and integrity. What a wonderful schoolboy telling off that is. Well, one thing is the FT, I mean, there is a picture of the guy. So like I said, I go through this on my commute. So I'm going to keep an eye out for this chap. Let's see if I bump into him and I can ask him about his Jobcentre Plus discounts that he's been coining as well. Oh yeah, he's got 50 % off rail because he's been, I don't know how this little scam works. He's been claiming job seekers allowance or something like that. Anyway, when you see him on the train, just give him a donut.

4:07All right. Just give him a donut. Well, look, this is how the rich get rich. You know, while I'm there buying my, instead of one, four pack of sausage rolls from Greg's and just spending all my money, like, you know, this guy's scrimpling his graving. He's got a two million pound house. Yeah, I'm worried. I'm worried that you're not presenting an aspiration enough view for the listeners of this podcast about your life. And I feel like you should be bawling a little bit, a little bit harder than Greg's. Well, look, I jest with my Greg discount card in my home office. But all right, well, let's, let's talk about this first story.

4:47And it's one that really jumped out and caught my eye obviously because it's such a familiar set of brands that that you probably use on at least a weekly basis maybe not chipotle but definitely a starbucks and that was some of the talk that was circulating in the last two weeks about starbucks rumor of acquiring chipotle so what do we have here yeah this is this was a really interesting rumor and a very much unconfirmed and then denied rumor. Very interesting to get into how a rumor spreads like this. But it gives us an opportunity, this rumor of Starbucks potentially acquiring the US-Mexican fast food chain, Chipotle.

5:34It gives us a really good opportunity to look a little bit below the hood of Starbucks, its strategy. Chipotle what that's all about and the CEO that unites the two companies together. So let's start at the beginning. A few weeks ago an exclusive FT article came out saying that Starbucks has been exploring a potential acquisition of the restaurant chain Chipotle. Now obviously on the back of an FT article come lots of other articles that cite the FT as the source of their knowledge. And they build upon the FT's article and they start talking about strategy and deal rationale and synergies and could this work?

6:19Would this work? And we all need a job, right, in the world of financial news. So we'll pick up on something like this extremely quickly. It could be a mega merger. I think Starbucks has an enterprise value of about$140 billion and Chipotle$40 to$45 billion. So a big acquisition. Could this work? Especially if you're in Manhattan or another central CBD of a US city, you're probably going to walk down a street and get two or three Starbucks and maybe one chipotle so is this is this a thing that could ever happen is my question yeah it's uh i always remember seeing uh there would be youtube videos that i'd get served or social media and it would talk about starbucks being like like a bank i think is it because of all the money that's held on a lot of loyalty cards that ends up just sat there almost like deposits that never actually gets spent.

7:21Curious, does Starbucks have an M &A track record of doing acquisitions in the history of its business? Well, interestingly enough, you mentioned the loyalty card, and it's a really interesting one because we're going to focus this rumor, which has since unfortunately been quashed by Starbucks. And we'll talk about that in a second. This story is linked together by ex-Chipotle CEO Brian Nichol, who joined Starbucks as CEO in October of 2024. And Starbucks, you're absolutely right. It gets very, very cheap funding, right? So instead of going out to the bond market or instead of taking out syndicated loans from a bunch of banks to finance this expansion it has a few billion of basically customer loyalty cards that it can borrow against or it can utilize uh whilst customers are not spending that money on their cards so yes you're absolutely right and chipotle did something very very similar so during uh Ryan Nichols reign between 2018 and 2024, a lot of the reason or the justification for their turnaround was based on this loyalty campaign, loyalty points, loyalty cards, which got people coming and buying more from Chipotle as well.

8:51But in answer to your second question, do Starbucks do acquisitions? Not really, right? And it's not the kind of company that really lends itself to acquisitions. The only kind of acquisitions that you can imagine with a company like Starbucks, which has got such a totemic or a brand synonymous with third spaces, with coffee, etc. The only types of acquisitions you really imagine it doing are big quasi real estate or franchise owners that own 150, whatever it might be, regional franchises of a defunct coffee shop that effectively get acquired by Starbucks and then rebranded and turned into Starbucks.

9:40So they're not particularly acquisitive, not at all acquisitive. so he's got you know so how did this rumor start that's the question the likelihood is that and this is the way that it works by the way i was on the train going down to uh to london a few weeks ago and i sat next to a banker uh from a investment bank very well-known investment bank and i said what are you what are you up to in london uh and he said oh i'm just going to talk to a couple of journalists off the record of course uh you know i you know they take me out for a decent lunch i say a few things hang about hang about hang about this is something you know presumably you've just got just got chatted to him this like banker looking guy and going yo dude like you're a banker and you've gone what are you up to and he's gone actually i'm going to go and spill the beans to a bunch of journalists about some deals i'm working on no no what actually happened was he sat next to me and i was working on a discounted cash flow model and uh and he was like oh that looks familiar uh and so we got chatting and yeah he was off to see a journalist to do something off the record.

10:45And that's probably how this Starbucks rumor started. A little off the record, maybe a few drinks, who knows. But the fact that this rumor got leaked, and it might have been an investment banker saying, hey, we've just pitched Starbucks. And you know, what's really weird is we suggested that maybe they should buy Chipotle. How fun is that? That is all it needs to be to turn into something that spirals into a thing that ends up sending Starbucks share price down 6.7%. So the market moves on this kind of stuff, right? I don't want to point fingers but I know on a recent episode we talked about it you had a name for it like the philosopher who was talking about the the pyramid of power almost with the consultants the lawyers the bankers where else what other profession if you go to Oxford and Cambridge and this is not pop shots this is like UK I guess classism for for a lack of a better framing but the other profession that doesn't serve regular folk very well is going into journalism and the reason why is because it notoriously pays badly so if you're from uh let's say the the regular background it's not really that attractive a pursuit because you can't make much money so then you've got the you've got the power of the sphere of influence and adjacent to that is the journalists which almost act as the periphery to the pyramid to give them even more influence absolutely absolutely and as you said you know although the golden days of fleet street might well be over it's still a position of prestige it's still a position of somewhat influence especially if you're in one of the more reputable uh publications and yeah you know it doesn't pay well but you get adjacent to the room where it happens and you can get very excited by being just to the side of big decisions and power and things like that.

12:49I'd love to know if there is any journalist listening of what is the actual process that a rumor needs to get to in the terms of it's to validate it enough that yes, it's hearsay, but there's enough here for me to put my neck on the block and talk about it in the public domain. I wonder what that looks like. practice yeah there's got to be there's got to be a little bit of a little bit of evidence a little bit of smoke you can't just especially if it's an ft exclusive you can't just make this stuff up so it has to be a source an unnamed unmentioned source but anyway i want to i want to speak very quickly about brian nickel have you heard of this bloke no so he is the ceo of Starbucks and almost more importantly, the ex-CEO of Chipotle.

13:41He moved, as I said, from Chipotle to Starbucks in 2024. And Chipotle, when he became CEO in 2018, was on its knees. It was terrible. It was really, really poorly performed. And share price was in the doldrums. They had a load of health and safety issues. I think there was a breakout of E. coli in a couple of its stores and no one wanted to go to Chipotle because it was disgusting. And over his six-year reign at Chipotle, its shares increased by 770%. It was one of those stocks that, whether you're lucky or extremely good it was it had return it had a returns profile that beat most of the tech stocks right the S &P only grew 100 % between 2018 and 2024 so this guy nickel it was the absolute and is the absolute darling of retail and of high street fast food kind of thing so much so that when it was announced that he was becoming ceo of starbucks starbucks share price jumped 24 which is their biggest ever jump anything that's ever happened in the history of starbucks the announcement that this guy who had turned around chipotle would be joining resulted in that 24 % uptick.

15:17Yeah. So what's his background then? Who is this guy? Well, all I know, well, I did a little bit of research on him. He got an MBA from the University of Chicago's Booth School of Business. And I was at Saeed Business School, Oxford's MBA program over the weekend doing some teaching. And one of the MBA candidates was from the University of Chicago. And he said that the unofficial motto of the University of Chicago is where fun goes to die. So maybe he's a fun guy, but maybe not. Anyway, so this bloke, he implements a few what you would consider to be startlingly simple things within chipotle in terms of safety food hygiene loyalty programs uh being open for more than just a kind of quick bite seating all of this stuff right uh rationalized the store footprint and then expanded it again when the going was a little bit better and you know since he left to start a chipotle share price has gone down by over 40 45 and starbucks which has been in the massive doldrum strategically has just started to tick up from a share price perspective i think it's up maybe 18 year to date which considering it's basically been flat for five years is no bad thing so i don't know if this guy's got the midas touch seems pretty impressive but going back then to these two companies.

16:56So just so I get a sense, if I missed it, how big are these two companies, just to start with? Do we have like a size comparison? Yeah, so Starbucks is about four times bigger from a market capitalization perspective, and even bigger still from a revenue perspective. Obviously, Starbucks is global. It has a franchise element. Chipotle is pretty much based in North America. We don't see, we might have one or two Chipoles here in the UK, but not really. It serves a very, very different function in our day-to-day lives. And if you think about the logic of a tie-up when it comes to retailers or hospitality or restaurants or whatever it might be, you've got to be thinking, what are the synergies, the benefits?

17:51And obviously, you can have two types of synergies. You can have cost synergies where by joining two companies together, you can save a bunch of money, whether that's head office, you don't need as many staff, or whether that's in your supply chain and you can really maximize and achieve economies of scale through your supplier relationships because you're a much bigger beast than you were before. Or you can achieve revenue synergies, which is bundling goods together. Chipotle and Starbucks would achieve neither, right? They don't have the same supply chain. It's a very, very different buying beans.

18:29And I know that Starbucks does more than buying coffee beans. It's very, very different from buying the perishable ingredients that go into Chipotle, right? So there wouldn't be synergies from that side. And then from a revenue synergies perspective, I think someone was reading the FT comments, always a good place to go if you want the real scoop, comments underneath the FT article. Someone said, can't wait for the new beef burrito flavored frappuccino with a crumbled tortilla on top. There's no revenue synergies here whatsoever, right? I'm not going to pick up a burrito in a Starbucks, I'm not going to get a Starbucks and a Chipotle.

19:10It's just not going to happen, right? So summary then, why has this happened? Why has this even got to the point of being a rumor mill? Well, I think it is the case that Chipotle has been in the doldrums from a share price perspective. So as soon as something has been a laggard for a long period of time, the share price hasn't moved it's actually gone down in the last five years despite the nickels bump before 2024 whenever a share price is going down going south acquisition talk always happens right one would expect it would be more from a private equity buyer perspective but it's that link it's the it's the brian nickel it's the ceo link and i can imagine and i think it's quite easy to imagine if I consider Chipotle to be my baby and to be the thing that made me, right?

20:11You know, the thing that broke me as a kind of, you know, as a superstar CEO and I see it going backwards, but I'm tied to Starbucks and I can't leave Starbucks. There must occasionally be a thought that goes through his brain. And this is maybe why the investment bank has pitched it, going, hmm, I wonder if I could jump in and save that company again, because I did it once and it's really hard to watch a company that I did so much for start to backslide. So that's why the rumor mill probably started getting going. Again, quickly quashed 6.7 % share price drop for Starbucks. This is not in any way liked by the market, and I think with good reason.

20:55All right, well, let's just take a quick break off that first story. And when we come back, we're going to talk about the billionaire Western family buying boots in the UK for£6.7 billion. See you shortly.

21:24open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required compatibility and availability varies 18 plus. Okay, just before the break, I was talking about this billionaire, the Western family, who I can't say I've heard of. So keen to get into that family. Because whenever you see it with the front runner billionaire put at the front, I'm always interested to see what the dynasty is to get to that point and then boots which is a company i know very clearly because they absolutely you know gutted my uh my dad's franchised opticians and squeezed him for every dime until his retirement so very keen to see uh what you have in the in the tank for this story steven tell what tell the story so your dad was an optician and boots just said he was an optician he had his own um sort of shop if you like or two shops at one point and then he ended up getting franchised with boots opticians and then they just the contracts are a nightmare and then you know i think they just got they were putting more and more pressure on the franchises it just became unworkable and then when he retired they eventually bought back the stock it was like yeah a ridiculous scenario situation so yeah he basically got got abused yeah well look that that that's pretty miserable and and shame on boots for putting their big footprint on the yeah exactly on the head of uh of someone that's trying to build a little business but anyway and and quite frankly the story of boots has been one of failure over the last 20 years anyway so maybe that gives your dad a bit of schadenfreude but i mean you're a high street man so i want to get your impression of boots we've spoken about in the past you're talking at double eight smiths you cannot stop talking about greg so i think you're probably a fan what do you think of boots i don't mind boots uh the reason why is because it's open later than the rest of the shops on the high street and when i have to hang out pick up the kids from clubs it's about one of the places i can go and peruse the aisles the only one thing i would say is that my goodness like wh.h smith or tg jones whichever you want to call it these days it just hasn't changed ever since i was a kid i mean i think they've tried to the cosmetic section i think they've tried to kind of galvanize a little bit uh to be a bit more trendy but it just feels like the literal interior of the shop was exactly what i remember from the 90s yeah and it's that horrible lighting and those office tiles on the on the ceiling that is the synonymous with both boots and wh smith the my my my bone to pick my bone of contention with boots is in our local boots their kid stuff like formula milk food whatever it might be all of that baby and kid stuff is on the first floor and you have to walk up unless you want to get a service elevator.

24:33And surely most people that are coming in with kids have prams. It's one of the most baffling decisions from a store layout perspective you can possibly imagine. And then you've got the men's moisturizer on the bottom floor. Oh yeah, absolutely. Yeah, it's bizarre. Anyway, back to the story. We're not a consumer podcast. Maybe we should be. Anyway, so on the 7th of October, Whittington Investments, which is the holding company of the Canadian billionaire, the Western family, agreed to buy boots from the US consumer-focused private equity firm Sycamore Partners and the Piscina family, the Italian Piscina family, who held a 44 % stake for around$9 billion, 6.7 billion pounds, including debt.

25:25What makes this deal so interesting, beyond the fact that it is a high street staple it's got a very very storied somewhat illustrious past on the UK high street but what makes this story so interesting from our perspective is that Sycamore the private equity owner only bought Boots last year via a 23.7 billion dollar take private of Boots's parent company Walgreen Boots Alliance. So that was in March 2025. And as soon as they did that, they split Walgreen Boots Alliance into five standalone companies. So this is a really interesting story from a private equity strategy perspective. We always think to ourselves very simplistically that what does private equity do?

26:27It buys a somewhat underperforming company, it chucks a load of debt into it, and then it sells it for a bit more, hopefully a few years later. But there's a lot more creativity and thought that goes into a strategy like this that is going to be extraordinarily complex. Even the concept of splitting Walgreen Boots Alliance into these five standalone companies, separate management, separate capital structures, separate debt, et cetera, and then trying to sell at least two or three of them in order to make the return and maybe hold one or two until the end of the life cycle. You know, this is fantastically complex, but seemingly potentially quite genius.

27:15So I'm assuming there's only so many private equity firms or investors that have the appetite and the ability to pull this type of feat off then or to have the appetite to want to go into this sort of thing. Yeah, this is really interesting because I was looking up Sycamore and I didn't know that much about them. They only have, bearing in mind that this deal was$23.7 billion, a big deal. Everyone knows what Walgreen Boots Alliance is, Sycamore has around$15 billion of assets under management. So it's buying a$24 billion company with total investable funds of$15 billion across all of their investments, all of their strategies.

28:03How it did it? Well, firstly, the equity check was just under for the 23.7 billion dollars was under 10 billion dollars obviously a decent amount of debt in that of that 10 billion a decent slug of that was the Piscina capital so previous owners they rolled over their investment i effectively sycamore didn't pay for any of the equity of Piscina and they injected more money, i.e. they bought a greater stake. So there's also some other pretty interesting structuring stuff around forward payment and some technical bits. Maybe Sycamore Paid invested$4 billion of their own equity into a$23.7 billion deal.

28:56and obviously they don't get all of the economics they don't get all of the upside Pesina this existing investor shares in that upside and obviously got to repay the debt holders and and pay interest and things like that but it is just quite instructive to think about we talk about Sycamore buying boots for 24 billion dollars but they've only put up three to four billion of their own cash. It's an interesting one, right? I mean, it's the way that private equity works, but it's worth delving into. You mentioned there's five standalone companies. So just want to get a sense of what we're actually talking about that's included in this deal, because there's probably parts of this which are very familiar to people in the UK, at least.

29:43Yeah. So the five separate companies that it's spun off into, as soon as this deal went through in March 2025, Walgreens, which is the big US version of Boots, Shields Health Solutions, Carecentric, and Village MD. So the Boots Group is what people here in the UK know. It's 177 years old. It was founded in Nottingham in 1849 by John Boot as a herbal remedy shop. It's quite interesting. Like 1849, you didn't have pharmaceuticals. You didn't have cosmetics in 1849. So this guy is way ahead of the curve. He's Frontier, Frontier Lab in Nottingham back in the day. It's a very interesting, yeah, it's very interesting that you say that, Frontier Lab.

30:39But Frontier Labs go from a valuation of zero to 100 billion seemingly overnight. it took 26 years to go from one store into a regional outfit and then another 20 years to go national right so this is not a fly-by-night success nothing that you do in 1849 that involves the high street i mean the concept of the high street didn't really exist back then But anyway, so Boots, what exists today and what is being sold is Boots UK and Ireland, which contains over 1 ,800 stores and 50 ,000 plus staff. Boots Opticians and that'd be interesting to know. Number seven beauty company, plus it's Thailand and franchise businesses, which are much, much, much, much smaller.

31:34So this is what's being sold for$8.9 billion. And by the way, Boots, before, you know, in the 2010s and before, was much, much bigger than this. 1800 stores is actually quite a skinny portfolio relative to what it was like in the listed, when it was listed in the, you know, 2010s and things like that. And what's the history then, before we get into the rationale of the deal, what's the history of the Western family? As I said at the beginning of this segment, I'm not familiar with this. what you said was a Canadian family. Yeah, so they're one of Canada's richest families. So Gallen Weston Jr.

32:16himself is worth$22 billion based on the Bloomberg Billionaires Index. That's not too bad. So it's not kind of must, it's not kind of Silicon Valley levels. They'll probably scoff at that. But$22 billion, not bad. The Weston family controls George Weston Limited and through it, very importantly, Loblaw, which is Canada's largest grocer with 2 ,800 plus locations, Shoppers Drug Mart, which is Canada's largest pharmacy, and Choice Properties, which is Canada's largest real estate investment trust. This makes sense then. You can already start thinking about the deal rationale. This makes sense as to why the Western family are thinking about expanding in the form of acquiring boots.

33:08So on that front then, what is the details there? What can we use as like a precedent that would be applicable to try and synthesize what it is that they could get out of buying boots? Yeah, so let's think about the deal rationale. I mean, they've done this before. That's probably the most important thing to say. It's the shopper's drug mart playbook. So Gallon Weston, who I've mentioned before, his biggest bet running Loblaw was buying shopper's drug mart, which as I said before, is Canada's biggest pharmacy chain. This was back in 2014. It's now Loblaw's, the big Canadian grocer supermarket, it's now their most profitable business.

33:51It's still adding 35 stores a year to its 1400 store network. How did he do it? And this could be good for you, Ant, as you while away the hours in the aisles of boots, waiting to pick up your kids. He renovated the stores and put sleek beauty boutiques at the front. So every customer walks past the high margin products first. I think this is something that we've seen now in a lot of boot stores and added a range of groceries as another reason to visit, essentially turning the stores from a simple pharmacy to a more general shop with some slightly more high margin consumables that you might otherwise not get in a shop like this.

34:36And bearing in mind that Loblaw's stock, its share price is up over 500 % since 2014, since the shopper's deal was announced, it feels like they absolutely struck gold with this we talked earlier in the podcast about synergies right compliments right so there is a great deal of synergies between shoppers drug mart and loblaw the great the supermarkets so can they achieve something somewhat similar with boots here in the uk we'll wait to see and so sycamore the firm you've been talking about just thinking about this the speed of which these companies have been involved in these types of transactions.

35:22So why are they offloading so soon after acquiring? It's a classic case, and we'll go on and talk about it in our final story. It's a classic case of, as a private equity firm, you have to do quite a lot of the structural stuff that you said that you were going to do in the investment committee to unlock value, right? There's got to be a strategy before you buy the business. They need to do quite a lot of this stuff very, very early on in order to give enough time for the upside, the value release from splitting this business up into five separate units and then selling a bunch of them. you need to give this enough time to kind of play out over the course of a five to six year hold period and if they're trying to get rid of five if they're trying to sell five businesses and they want to hold they want to have returned distributed all of the paid in capital within seven years let's say of the the five billion of equity that they put in or the four billion or whatever it might be, they're going to have to get busy.

36:37And maybe the easiest, most standalone entity of those five entities that is probably looking to sell was the Boots Group. So get rid of that, return some capital straight away. And this is quick, right? If I'm a limited partner, if I'm an investor in the Sycamore Fund that conducted this buyout, and I put in a percentage of that$4 billion and within 18 months, I'm starting to get some distributions, that is really, really good. And that is really, really positive. And it shows that Sycamore is very, very interested in and cares a lot about not just our book values going up, we're holding this asset and it's getting worth more money.

37:31Limited partners, investors in private equity firms increasingly want distributions. They want liquidity. They want money. They want to see that their private equity fund cares about them and wants to give them some money back so to finish this story what's some known obstacles barriers headwinds that could be problematic to just having a clear smooth execution of what you've described yeah i think i mean i think it's there's probably one major one right certainly from a from a western family's perspective i think that sycamore have probably played a bit of a blinder here but it's the renovation and it's the operating expenditure on the stores, right?

38:19This is going to be a significant investment to bring the Boots stores, to bring the Boots portfolio up to a standard, as we've discussed previously, that makes it feel like it's a decent place to buy stuff, maybe more than just the cosmetics and the pharmaceuticals that it currently does. I think it's also, I don't know what you think about this, but is this not quite a good thing for the UK high street? So you've got, instead of another private equity firm buying Boots off a previous private equity firm and the playbook in private equity, we all kind of know, this is a Canadian family, extremely wealthy, with a very, very long history, much like Boots, that has secured and enhanced a bunch of really valuable high street assets in Canada and probably certainly doesn't have the same impetus to flip after five to seven years like maybe the private equity firms would.

39:27So maybe. Bring them in. Welcome them in. Look, it can't be any worse, right, in terms of the way some of these other firms have gone on the UK high street. So why not give it a go and let's see. I will be in stores giving you on the ground intelligence week by week of how it's going. Let's do it. All right. To conclude that you did inform me that you wanted to talk a little bit about just the wider industry. So what do you have to close? Yeah. So the headline that I wanted to discuss, this was again a headline from last week, and I think it ties a lot of what we've been talking about with regards to consumer retail high street etc it ties it together quite nicely especially for UK listeners the headline is private equity offloads UK consumer retail chains so you will probably know that private equity owns a lot of the names the high street names that we've come to either know and love or know and somewhat despair at.

40:41And I'm actually going to give you a quick quiz. So the first one on my list of potential private equity-owned high street names that are potentially up for sale, the first one is Pizza Express. Now, my question to you, Ant, Pizza Express, it's not what your favorite Pizza Express pizza is. Mine is a Romana Padana. Okay. What is yours? you're a sloppy giuseppe kind of cat is that how do you know how do you know how do you have my profiling down so soundly but i'm i've not enjoyed a pizza express i would say since i started university which was 25 years ago is that you saying that you haven't you haven't had a pizza express that's me saying probably pizza express wasn't private equity owned back then and it's probably had several owners which have they've kind of taken some of the salt out of the dough they've put a little less butter in the dough balls it's got a little bit more pinched and it's gone from flipped from hand i mean what was the name of the pizza that they introduced that just had the big hole in the middle with a bunch of salad leaves with a bunch of rocket and they They were like, if you're on a diet, this is a great thing.

42:00You're just like, no, you're just getting less pizza and you're charging the same amount of money. I'm paying for private equity. So my question to you is, how many separate private equity firms have owned Pizza Express? Well, going off the math I said there of my last enjoyable experience at Pizza Express. However, actually that's a lie. I had my daughter's birthday party. I did a really good job actually there. and it was really quite affordable. So any parents out there who want to do a young child's party, Pizza Express, highly recommended. Cheaper than bowling, cheaper than Laser Quest. But I'm going to say four.

42:43Oh my God, you're on fire. You really know your high street. Four private equity owners, potentially seem to be five, four private equity owners. There you go. It's like, do the math. It's just basically five or six years each. Going back to my 2001 example. Well, correct. So in 2003, TDR Capital and Capricorn bought Pizza Express. So it was good before 2003. Sinven bought it again in 2007. Hone Capital, Chinese private equity firm, paid 900 million quid for it in 2014. And then the Bain Capital Special Situation Fund and Cyrus bought it again in 2020, as it was about to go bust as a result of COVID, right?

43:30So actually in July 2020, the bondholders took over the business. They swapped the debt for shares. And since then it's been owned by these two firms, Bain Capital and Cyrus. Now, again, the rumor mill is churning and it seems like Pizza Express, press five or six years on from that 2020 special situations restructuring and buyout it's up for sale again so bain and cyrus are working with rothschilds looking at a 500 million pound exit i the article that i read said they're exploring a number of strategic and financial sponsor options i.e. private equity firms. I wouldn't be surprised if it moves to another private equity firm and we hit number five in the private equity game of pass the parcel that Pizza Express is on at the moment.

44:27It's just a remarkable thing, isn't it? To be passed from so many private equity firms, from one to another to another. And I guess, is it what? It's an okay business and it's a case of a private equity firm needs to just have some for a period of time and then they need some liquidity another one needs to also go into new deployment of funds is it just does it just suit everyone the business doesn't necessarily uh go through a period of reclaiming former glories like you're saying that could happen with boots but it just ticks along fine it's ever present it does its thing you've got a pretty good i'm i'd imagine the performance of the financials of pizza express that hasn't really changed a great deal over the last decade so it's pretty stable i would imagine and that's what makes it and again i referenced the investment committee earlier on that's what makes it a somewhat easier sell from an investment committee perspective you've got a not particularly exciting not particularly fast well not particularly growing at all, relatively stable, but not particularly impressive margins business that has been probably squeezed from a management perspective and from a private equity cost control perspective as much as it can be.

45:52So this is a simple case of, all right, let's say I buy, you know, me and you together, we launched private equity firm and we buy Pizza Express for 500 million pounds, right? and we put in 200 million of our own equity and we think the business can probably pay the interest and start paying down 300 million pounds of debt because it makes a profit and it's a relatively stable business fast forward if we just if we don't mess it up if we don't mess it up fast forward six years time, right? And maybe the business has got a little bit better and maybe 150 million pounds of that debt has been paid down.

46:38We're suddenly selling the business for 700 million pounds, not that impressive, 500 to 700 million pounds, but we paid down a bunch of debt. So our equity check coming out is 550 million pounds. Our equity check going in is 200 million pounds. So without doing that much, just hoping and almost letting the course of time increase the valuation of a business and paying down debt through its profits, not reinvesting that much into the business. We have a two, two and a half X return on investment, 20 % IRR, whatever the number is, internal rate of return. And that, you know, that is the most, if we talk about the Sycamore boots being a very creative, complex private equity deal, this is like, you know, as vanilla as it possibly gets.

47:34And just to kind of expand this very quickly, the likes of Morrisons. They were acquired by CD &R, Clayton Dubillier and Rice in October 2021. They are probably going to be up for sale quite soon. Itzu, which acquired a minority stake. Sorry, Bridgepoint acquired a minority stake in Itzu in 2021. That looks like it's going to be up for sale. Well, that minority stake is going to be up for sale. Waterstones, which interestingly enough is owned by activist hedge fund, Elliott Management, which I didn't know, is looking to IPO as soon as possible. And then Poundland, I'm just wrapping this episode up with a bit of Poundland.

48:21Poundland, which was acquired quite wonderfully for one pound by US investment firm Gordon Brothers, is looking for a white knight, i.e. a savior acquirer, as the firm is heading towards bankruptcy. So this is just the cycle of things. So many of these really well-known brands and really well-known high street restaurants, retailers, fast food, etc. They're coming to the end of a cycle of mainly US private equity ownership. And therefore, they're figuring out what they have. lots of private equity firms need to release capital, distribute capital back to their investors. So there's a lot of companies that are coming on the market.

49:08And we spoke about Argos a few weeks ago as a different situation. But yeah, it's a bit of a shakeup for the high street. Just to tie it up as well, what is the implication of potentially higher interest rates on the private equity move to want to sell? How's that going to factor into their planning? Yeah, absolutely. So let's say I acquired Pizza Express in 2020, I would have locked in a very, very favorable set of terms, interest rates on my debt package. and you know as as the years go on a lot of these debt instruments have five to seven year seven year terms and therefore it's the refinancing window that probably opened last year for Rothschild's debt sorry for pizza express's debt and you're going to refinance and that's going to be a lot more costly and therefore you can't take out as much debt you can't service that debt with your profit, you can't pay as much interest than you previously would be able to.

50:18So yeah, we're in that phase where debt is more expensive and refinancing is coming up. The investors in private equity funds are looking for distributions, looking for liquidity. And therefore, even if it might be expedient to hold on for another couple of years from a turnaround perspective or whatever it might be. It's the right time from a capital structure, cost of capital, keeping the limited partners on your side perspective. Closing stats that our researcher had to add some context of everything we talked about. Total volume of UK target retail deal making topped$10 billion this year across 54 transactions according to DealLogic's data.

51:05That's up from nearly 5 billion across all of last year. I mean, that's just pretty huge. Yeah, it's bonkers. All right. Well, thank you so much, everyone, for listening. As ever, let us know in the comments if you are a journalist, if you are a lover of Pizza Express or Boots. We would love to have your input. We know that I think quite a few people left comments when we talked about WH Smith, didn't they? About their feelings. So it'd be interesting to see what this invokes emotionally. Yeah, and one more thing. If you've got to the end of this episode, you must fill out our survey as well. Shows that you're a keen listener.

51:47You got to the end. You can spare a couple of minutes. Fill out the survey. Indeed. All right. Thank you for listening. And thank you, Stephen. We'll see you next week. Is your home wishlist just sitting in your cart? Well, get ready to hit checkout because Wayday at Wayfair is here. Save up to 80 % off everything home during the biggest sale of the year. Whether you're refreshing the living room, upgrading the bedroom, or finally tackling that home project you've been putting off, now's the time to save big. Shop Wayfair's Wayday sale and get up to 80 % off now till October 26th. These deals won't last.

52:20Go to Wayfair.com today. Wayfair, every style, every home. Thanks, Anne.