Aramark May Go Private Again

FM Staff

On May 1, an investment group led by Chairman/CEO Joseph Neubauer offered $32 a share to take Aramark Corp. private in a deal valued at $5.77 billion. Besides Neubauer, the group includes private equity firms Thomas H. Lee Partners and Warburg Pincus LLC, as well as GS Capital Partners and J.P. Morgan Partners, the private equity arms of Goldman Sachs Group, Inc., and JPMorgan Chase & Co..

A few weeks later, the company announced that it had hired Credit Suisse Securities LLC to help it evaluate the offer, as well as other available alternatives.

Analysts who follow Aramark say the $32 a share offer will almost certainly have to be raised if a bid is to be successful. Indeed, soon after the offer was announced, the company's stock price, which had been trading at around $28, rose above $34 before falling back but remaining above $32 as of FM press time in late May. This is a clear indication, analysts say, that investors expect competing offers, most likely from private equity firms, that would push the price up.

"While an increase in the offer price may be on the horizon, we find it hard to argue that the current deal meaningfully undervalues shares," suggested CIBC World Markets analyst Thatcher Thompson in a research report following the offer.

The question is how much the company is actually worth. Some analysts peg it to be as much as $35 a share. However, in an unusually forceful analysis in the British Caterer Search trade news service, one industry consultant made a case that Aramark's going private, along with a similar recent move by the European catering firm Elior SA, represents a return back to fiscal reality for the contract foodservice sector.

In his article, "What Determines True Value" (the full text can be found at http://www.caterersearch.com/Articles/Article.aspx? liArticleID=306881), Jonathan Knight, head of management services and business development at the British consulting firm Tricon Foodservice Consultants, argues that "[Aramark and Elior] believe they are undervalued by their respective stock markets because investors want quick results and high net profits and do not really understand what the contract catering/concession business is all about."

He notes the difficulties recently encountered by the two other major publicly held contract management companies, Compass Group PLC and Sodexho Alliance SA, in meeting shareholder expectations. Meanwhile, "mid-sized, privately-owned companies are currently enjoying growth spurts, suggesting that private ownership offers operators more control over their destinies."

"...perhaps the message is at last sinking in that contract catering is not about quick fixes and fast-buck returns," he argues. "It's about a steadilygrowing but undervalued support service which entails low capital investment and little risk.

"There is a real question whether the contract catering industry can survive in its current guise," he adds ominously. "It is being gobbled away at one end by competition from fast-growing retailers and chain operators. At the other end, its financial backers have been led to expect results which have been proved to be neither warranted nor sustainable."

Aramark has historically gone through several stages of public and private ownership. The company, originally known as ARA Services, began as a private firm in 1936 and went public in 1960 following a major merger. A hostile takeover bid led to a management buyout led by Neubauer in 1984. The firm remained privately held until 2001, when it made a successful return to the public domain with a listing on the New York Stock Exchange.