Cinven Gardner Merchant Private Equity

Gardner Merchant (GM) is a contract catering and facilities management services business covering the entire process of serving meals from staffing to cooking. GM consists of five business areas (contract catering, specialist catering, Kelvin, Lockhart and France Production) of which contract catering is the biggest in terms of EBIT contribution. GM's main operations are in the UK, but GM offers services as well in selected countries in Europe, the US, Australia and the Far East. The opportunity for Cinven, a private equity fund, to invest in GM has arisen as GM's parent company Forte Plc decided to sell GM to reduce a heavy debt load and focus on core business. At the time of the case, in addition to underperformance, this was the major reason for buyouts.

THE MARKET CONDITIONS

The European buyout market had emerged in the previous decade. At the time of the case, the peak had been seen and many LBO funds were faltering. A deal as big as the proposed GM deal, with a transaction value of even GBP402 million, had not been executed in three years, and by Cinven management ever.

THE CATERING MARKET

The catering market is coined with fragmentation and is largely held by small local players. GM believed its advantage in markets was excellent quality, a basis for which contracts are awarded on in addition to price. Major competitors include Compass, from which GM had been taking market share as well as Sutcliffe. Interestingly, a reason behind previous BO attempts failing was Compass along with another competitor ARA, making a purchase offer on GM, though the deal fell apart due to legal issues.

Regarding the contract catering market, GM's market shares differ regarding markets, as do general market penetration levels. Market penetration in the UK had grown with a CAGR of 5.5% since 1985, implying slow penetration of markets. GM is also market leader in Holland, with overall market penetration of 47% compared to UK's 49%. In France market share is an extremely small 3.7%. In the US, market share is overall low but fairly concentrated in certain areas.

GM is also the market leader in the contract catering and specialist catering markets in the UK as well as with Lockhart, a separate business with which GM is the market leader in the sale and distribution of catering equipment. Kelvin (providing catering services to oilrigs) was the market leader in its market, with a recently increased its market share, though forecasts for future growth were limited due to the business being depressed. Meanwhile, France Production is not as established in its markets.

THE FUND

Cinven is the PE manager for three pension funds. Cinven's strategy is to be the lead investor in medium to large (transaction size GBP50 million to GBP1 billion) European, though previously mainly UK, management buy-outs