A slice of the action

The IPO of Gondola Holdings last November marked the return of restaurant chain PizzaExpress to the London Stock Exchange.In November 2005, Gondola Holdings, the holding company of the PizzaExpress, ASK and Zizzi restaurant chains, floated on the London Stock Exchange (LSE) with a market capitalisation of approximately £480m. The flotation marked a return to the LSE for PizzaExpress, which only three years previously had been taken private by private equity houses TDR Capital and Capricorn Ventures International. The flotation of Gondola created the UK’s leading casual dining group, with 497 restaurants across the UK and the Republic of Ireland and employing around 10,000 staff.PizzaExpress is an iconic brand in the UK. It was established in 1965 when the first restaurant was opened in Soho, London, by Peter Boizot. PizzaExpress first floated on the LSE in 1993. ASK, named after its founders Adam and Sam Kaye, was set up in 1993 to follow the success of the PizzaExpress concept. ASK floated on London’s Alternative Investment Market (AIM) in 1995. The ASK Group then set up Zizzi in 1999 to expand its customer base by developing a more ’upmarket’ pizza/pasta concept. PizzaExpress, ASK and Zizzi operate as three separate brands, as each is perceived as having a distinctive appeal for different occasions.The IPO
An initial public offering (IPO) involves the issue of securities (eg shares) by a company which does not already have securities trading on the LSE or AIM. The Gondola IPO was structured as an international offering of shares by Gondola to institutional investors (also known as a ’primary’ offering).The majority shareholders in Gondola at the time of the IPO, TDR and Capricorn, sold a small proportion of their respective holdings as part of the over-allotment arrangements.

  • Gondola was able to raise cash from the proceeds of the issue of new shares to investors, which helped to repay existing shareholder debt.
  • As founding shareholders in Gondola, TDR and Capricorn were able to realise some of their investment by selling down some of their shares as part of the over-allotment arrangements.
  • Gondola was able to increase its public profile, brand recognition and credibility with its customers, suppliers and employees as a result of increased media coverage through the IPO process.
  • The IPO will assist Gondola in recruiting, retaining and incentivising key management and employees.

The lawyers’ roles
Magic circle firm Linklaters advised Gondola in relation to its obligations under the Listing Rules, the Companies Act and other applicable regulations and legislation on the IPO. It was also responsible for initiating the drafting of many of the key documents required in connection with the IPO, including the prospectus.Meanwhile, Freshfields Bruckhaus Deringer acted for the financial adviser to Gondola, as well as the banks that were underwriting the shares to be issued by Gondola on the IPO. Given the complexity of the group structure, and the fact that an extensive reorganisation of the group needed to take place before the IPO, top 10 City firm Herbert Smith was involved in drafting the majority of the reorganisation documents as well as for supervising the reorganisation process.Other legal advisers were involved in advising Gondola on its new banking facilities and amended share incentive arrangements.Much of the IPO work involved preparing Gondola for life as a listed company. For example, it was necessary to appoint new executive and non-executive directors to the Gondola board before the IPO and to update the company’s share incentive arrangements and its management and committee structure, all of which took time and planning.Preparation for these steps was linked with the process of due diligence on the group. Due diligence involves the legal and other professional advisers examining documentary material on the group (eg contracts entered into by the company and/or its subsidiaries, board and shareholder minutes and leases for the group’s restaurants) to identify any issues that needed to be remedied ahead of the IPO and the matters that needed disclosure in the prospectus.Running in parallel with the preparatory steps described above was the preparation of the prospectus, which is the document that potential investors read to decide whether or not they want to invest in the company. The prospectus is a ’glossy’ document containing, among other things, detailed information on the company and its businesses, a description of the company’s trading and financial performance, historical financial information and other information, such as changes in the company’s share capital, as well as information on the industry in which the group operates.The content of the prospectus is guided by the Listing Rules, which set out the conditions for a London listing, and the Prospectus Rules, which determine the minimum contents for documents to be used for any EU listing or offer of securities to the public in the EU. The final version of the prospectus must be formally approved by City regulator the Financial Services Authority (FSA) before it can be issued to investors.The drafting of the prospectus involved extensive participation by TDR, Capricorn, the financial adviser, the underwriters, and key members of Gondola’s management. It was drafted principally by Linklaters, with input from Freshfields, Herbert Smith and the other legal advisers. The auditors to Gondola assisted the company in preparing the financial information required.Marketing for the IPO, in one form or another, begins before the prospectus is formally approved by the FSA. In respect of the Gondola IPO, a pathfinder document was produced to whet the appetite of potential investors before the formally approved prospectus was distributed.As mentioned above, there was a corporate restructuring of the group, which completed on the day before the IPO. This consisted, among other things, of a simplification of the existing shareholder debt structure of the group in place after the PizzaExpress and ASK acquisitions, and a shareholder-approved reduction of capital, subject to post-IPO court approval, to provide reserves enabling the payment of dividends. The group also sold off certain underperforming PizzaExpress, ASK and Zizzi restaurants, Café Pasta operations, non-UK franchise operations and remaining UK franchise operations.Continuing obligationsThere are various new obligations and recommendations now incumbent on Gondola as a listed company that it was not subject to as a private company:

  • The directors of Gondola are now subject to new responsibilities, including continuing obligations imposed by the rules of the FSA, and more onerous corporate governance requirements recommended by virtue of the company’s compliance with the Combined Code.
  • The process of decision-making for the company is now more formalised than previously, and will typically involve the approval of the non-executive directors on major issues.
  • The company now has a large list of public shareholders. These will follow closely the trend in the company’s earnings per share and will expect regular dividends, and they will vote with their feet if the company does not perform according to expectations.

Andy Hunt and Mark Cooper are associates in the corporate department at Linklaters

Jargon Buster:

Casual dining: a sit-down meal (with waiter/waitress service) with appetiser, main course, dessert and payment after eating.
Combined Code: a set of principles of good governance and a code of best practice. Although the Combined Code does not form part of the Listing Rules, companies are required by the Listing Rules to include in their annual report and accounts a statement of how they have applied the general principles of good governance set out in the Combined Code, and whether or not they have complied with the more detailed provisions of the code of best practice set out in the Combined Code throughout the accounting period.
Listing Rules: also known as the ’Purple Book’, the Listing Rules dictate such matters as the contents of the prospectus on an initial public offering (IPO) and ongoing obligations, such as the disclosure of inside information, communications on new share offers, rights issues and potential or actual takeover bids for the company.
Prospectus Rules: these set out the minimum content of any prospectus to be used for an application for listing or public offer of securities in the EU.
Offer price: the price at which shares will be offered to institutional investors in the IPO.
Over-allotment arrangements: arrangements by which a stabilising manager (often one of the investment banks advising on the IPO or underwriting the issue of shares in the IPO) may initially allocate more shares to investors than are being offered in the IPO to satisfy demand for the shares. The stabilising manager can then call on the shareholders to sell those shares at the offer price if the manager’s short position has not been covered in the meantime by stabilising purchases. Announcement by Gondola of itsintention to float.

Key Dates in the IPO Timetable:

21 October 2005
Announcement by Gondola of its intention to float.
Publication of pathfinder.
’Roadshow’ of presentations by management to prospective institutional investors commences. 3 November 2005
Publication of prospectus andannouncement of offer price. 7 November 2005
Completion of intra-group reorganisation.8 November 2005
Closing of the issue of shares.
Payment to the company of the proceeds of the offering. Commencement of tradingon the London Stock Exchange.18 November 2005
Exercise of over-allotment arrangements.