The year 2019 was an annus horribilis for Luke Johnson. The founder of Risk Capital Partners was executive chair of Patisserie Valerie when the pastry chain stumbled onto a £94m accounting fraud and collapsed.
Seven years later, he’s betting that another darling of the aspirational British pastry consumer will have better luck. Gail’s, one of Johnson’s largest investments, has appointed Goldman Sachs to secure new funds and maybe an exit for investors.
Haven’t we seen this panto before? Last December, Gail’s cast Goldman to oversee a short-lived sale. Sceptics might say this looks like a clever bit of pre-Chrimbo advertising.
On the face of it, Gail’s is a great business. The Observer has talked to several industry veterans and all agree the brand is a paragon of quality, attention to detail and formidable site-level economics. Great profit, great return on equity. The question is, will it secure fresh capital? For most market watchers, it comes down to price. Like customers hovering over Gail’s toasty warm, fragrant £3 mince pies, investors are wondering if it’s worth the munch.
If anyone can sell Gail’s it’s Goldman. Last Christmas Eve, the bank delivered the Wingstop deal on an extraordinary valuation of £400m, and this year has advised on 34% of global mergers by value.
Gail’s delivers around £50m of EBITDA (earnings before interest, taxes, depreciation and amortisation) and values the business at around 12 times that: £600m. This is racy stuff in a market where brands delivering an excellent 40% return on capital are usually valued at five-to-six times EBITDA. To judge value, new investors must be clear on the growth needed to secure their eventual exit. Unless, of course, they run Gail’s for cash. That would equate to 12 years alone to pay down the cost of acquisition.
Any path to exit assumes Gail’s grows from 170 or so sites today to a larger number. Gail’s has opened up to 40 sites in 2025 and so might expect to open 200 sites within five years, reaching a grand total of 370 sites and a potential doubling in value to over £1bn. Can the UK take more than 370 Gail’s outlets? Yes, say the veterans who believe the brand does independent artisan bakery better than, er, independent artisan bakeries. Great food, strong service culture, quasi-cult following, consistency, lean operating model, multi-channel sales, lower capital expenditure, central bakeries. It all favours expansion and, if Caffe Nero operates 800 UK sites, surely Gail’s has ample “white space” for growth.
The naysayers wonder if the exceptional unit level economics of a Gail’s in yoga-mum suburban London stacks up nationally, and can follow in the footsteps of a value brand like Greggs. But a recent viewing of a packed Gail’s in Birmingham New Street station next to an empty 1998 vintage Pret a Manger is a reason to be cheerful. Go west (or east), say others, who see international potential for Gail’s and wonder why the UK has no hospitality brand as global as the French bakery brand Paul.
Will the deal be done? If Gail’s can’t get funding, no one can. The key is price and whether the owners exit or stay, and who has control. If Johnson gets a £500m+ valuation, Gail’s is surely a magnificent phoenix rising from the flames of Patisserie Valerie.
Photograph by KAPhotography