Nightcap offered to investors

Drinks-led hospitality group Nightcap is raising money via PrimaryBid ahead of a flotation on AIM. At the same time, London Cocktail Club is being reversed into the business in a deal for an initial £5.7m in cash and shares at the issue price. Further acquisitions are likely so that the group can roll out other drinks-led brands.

The offer price and amount to be raised have not been declared. Nightcap will use some of the money raised to pay the £2.2m cash element of the acquisition and should have money over to finance other acquisitions. The offer closes on 21 September.

The initial 25 million shares in Nightcap were issued for 2p each and last month 14.9 million shares were issued at 5p each. That raised £1.24m and there was a loss of £256,000 up until the end of November.

London Cocktail Club

London Cocktail Club was founded in 2010 by a group of investors including Nightcap founder and chief executive Sarah Willingham. There are ten London Cocktail Club leasehold sites and, except for one in Bristol, they are in the Greater London area. The plan is to quadruple the number of sites by taking advantage of the potential for snapping up attractively priced sites.

Some landlords have agreed to rent reductions in 2020. Management is trying to get reductions of around one-fifth. In some cases, the leases have been extended as part of the negotiations.

Financials

In the year to June 2020, London Cocktail Club revenues were £5.2m and there was a loss of £616,000. In the first quarter of this financial year, revenues fell from £1.57m to £1.25m, but the loss was halved to £64,000 thanks to a government Covid-19 credit of £121,000.

Net debt was just over £800,000 at the end of September. There were also lease liabilities of £5.1m. There is a concern that if bars remain shut then the bank covenants could be breached next year.

Not all sites have been successful. The Islington site was closed, and the lease assigned to a new tenant in 2019. There is still more than eight years left on the lease and the company could become liable if the new tenant defaulted.

Board

Nightcap non-executive chairman Gareth Edwards is also a director of the recently floated Various Eateries (LON: VARE). Various Eateries has a similar strategy but for restaurants.

The annual board remuneration is £550,000 before any bonuses and pension contributions. Non-executive Tobias van der Meer will not initially be paid a fee.

The directors’ remuneration is high considering the size of the operating business and the fact that it is losing money. Nightcap will need to do other deals to justify this level of remuneration.

Litigation

There is potential litigation with a corporate finance adviser that was hired to help sell London Cocktail Club. A buyer was not found, and the engagement was ended on 16 June. The adviser believes it should be paid its success fee for the acquisition by Nightcap.

Some of the vendors of the business have indemnified Nightcap if the fee is payable, along with related costs.

Future

Edison Group has written a pre-IPO research note. It suggests that, excluding the Covid-19 impact and taking account of full contributions from newer openings, London Cocktail Club could generate annual pro forma EBITDA of £1.8m. This also assumes that management improves margins.

Depreciation is running at more than £1m a year and there will still be an interest charge after the fund raising. On top of that there are additional corporate overheads.

Nightcap should be in a strong position when it comes to taking on new sites. Many bars will not survive, and landlords will want new tenants. There will also be opportunities to acquire other bar chains.

However, there is still enormous uncertainty in the pubs and bars sector. The fundraising has been promoted on the back of Sarah Willingham being on Dragon’s Den on BBC2, but that is no guarantee of success.