Cinven and Tiller Foodservices

by
Steven N. Kaplan and Aaron Peck1
Graduate School of Business, University of Chicago

1. Intro

As 1992 drew to a close, Hugh Langmuir, Brian Linden, and Brent Wheeler wondered
whether they had made the right decision in recommending their partners at Cinven go ahead with
the management buyout of Tiller Foodservices. At a transaction value of £402 million, the Tiller
Foodservices deal was the largest that any of the three had ever led. Conventional wisdom in the
U.K. buyout market was that a buyout of more than £250 million could not be completed. In
fact, Cinven had not completed a deal this large since 1988, and no one in the entire European
buyout market had completed a deal this large since 1989.

Tiller Foodservices was engaged in the contract catering and facilities management
services business. In early 1992, its parent, Luxe PLC, had decided to sell Tiller Foodservices in
order to reduce a heavy debt load and focus on its core business of luxury hotels. By September,
however, plans to spin off Tiller Foodservices to Luxe shareholders as well as three other buyout
offers had failed. At this time, Cinven approached Luxe, and Luxe agreed to begin talks with
Cinven. Within a week, Cinven had made an offer that was in line with the previous buyout bids.

2. Cinven
Background and History

Cinven was established in 1977 as the “in-house” private equity manager for the British
Coal Pension Funds, one of the United Kingdom’s (U.K.’s) largest pension funds. Subsequently,
the firm developed exclusive arrangements to manage the entire private equity investment
allocations of two additional pension funds: Railways Pension Schemes (in 1988), and Barclays
Bank Pension Fund (in 1990).

1
Some information and facts have been disguised. Copyright @1998 by Steven N. Kaplan.
Cinven’s Investment Strategy

Cinven’s strategy was to be the lead investor in medium to large European management
buyouts (MBOs) and management buy-ins (MBIs) – with transaction sizes ranging from £50
million to close to £1 billion. Historically, approximately 85% of the companies Cinven had
invested in had been headquartered in the U.K., with some 50% of the companies having a pan-
European or global character.

Cinven looked to invest in high quality market leading businesses. An important element
to Cinven in the assessment of a business was whether it had competitive advantages. In
particular, Cinven sought companies with one or more of the following characteristics:

• High level of brand name recognition

• Respected product quality
• Strong technological expertise
• Cost advantage over competitors

Cinven also focused on adding value to its investments. The partners felt they had
significant experience in identifying and motivating strong management groups. In many cases,
Cinven would take an active role in recruiting additional experienced managers to strengthen an
existing team. In virtually all investments, Cinven would appoint a new Chairman who would
typically be an entrepreneur with relevant experience.

Once the investment was closed and the incentives structured, Cinven worked closely with
its portfolio companies to develop and apply resource driven business development strategies.
Cinven’s directors would typically be involved in all major business decisions as well as any
changes in corporate strategy.

Deal Flow and Track Record

Cinven believed the quality and number of opportunities it generated for potential
investment was unmatched by those available to other MBO and MBI sponsors. Cinven based
this belief on the following factors:

• The firm’s pre-eminent U.K. market position

• The quality, depth and stability of the Cinven investment team
• The firm’s credibility and reputation with sellers of companies,
intermediaries and financing sources
• The size of capital available to the firm
• The firm’s proactive approach to identifying acquisition candidates
• The firm’s independent ownership

Cinven and Tiller Foodservices 2

 Exhibit 1 lists the transactions Cinven had led in the previous six years
(1986 to 1992).

Cinven believed it had a very successful track record. Since its creation in 1977, the
Cinven team had earned a gross IRR of 40% on realized investments and 31% on all of its
investments. Cinven believed that its returns over the previous six years had been in line with
those over the entire 15 years of Cinven’s existence.

Management Team

In 1992, Cinven's management team included 11 investment professionals. Cinven

believed that this relatively large number of experienced, senior investment professionals enabled
the firm to evaluate and process a large number of transactions, many of significant complexity.
Exhibit 2 provides a list of the team and description of their backgrounds at the time.

3. The European Buyout Market in 19922

Like the U.S. buyout market, the European buyout market emerged as a substantial
market in the 1980s. The European market had been dominated by activity in the United
Kingdom. As exhibit 3 indicates, U.K. deals accounted for more than half of the activity in
Europe from 1989 to 1992.

The largest source of buyouts in Europe overall and in the U.K. in particular, was from
voluntary divestitures by domestic companies. The majority of these were of underperforming or
strategically undesirable divisions. This pattern was substantially different from that of the U.S.
market which was driven by buyouts of public companies.

Buyouts in Europe also differed from those of the U.S. in that they were typically less
highly leveraged . In the U.K., buyouts were typically capitalized with roughly 20% equity even
in the late 1980s, a period when U.S. buyouts were often structured with less than 10% equity.

Exhibit 3 also indicates that like the U.S. buyout market, the European market had peaked
in 1989. Like the U.S. deals of the late 1980s, a number of European deals completed in the late
1980s had subsequently defaulted. The memory of those defaults undoubtedly contributed to the
decline in volume on both sides of the Atlantic. It is worth noting, however, that the decline in
deal volume was not quite so precipitous in Europe as in the U.S., probably because buyouts in
Europe were not so heavily concentrated in buyouts of public companies which all but

2 This section is based on “Corporate Restructuring, Buyouts and Managerial Equity: The European Dimension,” by
Mike Wright and Ken Robbie in the Journal of Applied Corporate Finance, Winter 1991, 46-58. See also, “The
Evolution of Buyout Pricing and Financial Structure (or What Went Wrong) in the 1980s,” by Steven Kaplan and
Jeremy Stein, in the Journal of Applied Corporate Finance, Spring 1993.

Cinven and Tiller Foodservices 3

disappeared in the U.S. The recessionary conditions in both the U.S. and Europe in the early
1990s also contributed to the decline in transaction volume. In such economic circumstances,
banks were reluctant to lend to leveraged buyouts.

As noted above, there was some skepticism in the financial community concerning
whether a buyout group like Cinven could raise the debt financing necessary for a deal of Tiller
Foodservices’size.

4. Tiller Foodservices

Tiller Foodservices (Tiller) was engaged in the contract catering and facilities management
services business. This primarily involved the production and merchandising of all meals on behalf
of its clients with Tiller employing all staff, sourcing foodstuffs and managing the entire operation.
Clients typically included businesses, schools, and hospitals.

The Business

Tiller consisted of five main businesses, which generated the following operating profits
(or EBIT) in 1992:

£m
Contract Catering 32.1
Specialist Catering 0.2
Kelvin 3.0
Lockhart 1.4
France Production 1.4
38.1
Head Office Costs (1.7)
Total 36.4

Contract Catering

The main business of Tiller, representing over 70% of operating profits, was the provision
of contract catering services to commerce and industry. In the U.K. and Holland, the company
was the market leader. The typical service provided was running canteens and restaurants within
clients’premises.

The company also provided these services in other European countries, the USA and the
Far East. The geographic breakdown of this business was as follows:

Cinven and Tiller Foodservices 4

 1992/93 Percentage
Country Budgeted of Total Number of
Profit Profit Contracts
£m % No.
U.K. 22.5 70 2,470
Holland 5.7 18 776
France 1.4 4 329
Belgium 0.4 1 102
Other (0.1) - 18
European
Countries
USA 1.6 5 517
Australia 0.6 2 134
Far East - - 40
TOTAL 32.1 100 4,386

Because it had invested heavily in infrastructure and systems over the previous years,
Tiller was able to analyze in detail the profitability of individual contracts. In addition, this
investment meant that Tiller had excess system capacity to add new contracts without incurring
additional costs.

Specialist Catering, Kelvin, Lockhart, France Production

The company’s Specialist Catering division was the market leader in the U.K. for
providing catering services for major sporting events and in-store catering. The Kelvin division
operated contracts providing catering and facilities management services on oil rigs and other oil
related locations in the North Sea. Lockhart, which was run as a separate business, was the
market leader in the wholesale and distribution of catering equipment to both hotels and
restaurants. Customers could shop in showroom locations or from a catalog containing over
6,000 items. France Production was a production operation located north of Paris with a
wholesale butchery and charcuterie business, a patisserie and two kitchens producing complete
meals.

Cinven and Tiller Foodservices 5

Markets and Competition

Contract Catering

Tiller Foodservices believed that the market size for contract catering in the U.K. was
approximately 17,600 opportunities at sites with in excess of 150 employees. Based on this
market size, penetration in the U.K. by contract caterers exceeded 8,300 contracts (49%), up
from 6,000 in 1985. In the U.K., Tiller Foodservices had 2,470 contracts in this segment, which
the company believed comprises approximately 39% of the market by value and 14% of the total
opportunities that exist.

Tiller’s major competitors included Compass and Sutcliffe, which had 26% and 19%
market shares, respectively. The balance of the market was fragmented and largely taken by small
local players. New contracts were awarded based on a combination of price and quality. Tiller
believed that it had an excellent reputation in the industry for quality. The company had been
increasing its share of the larger contracts largely at the expense of Compass.

In Holland, the believed that it was the market leader, with more than twice the number of
contracts of its nearest rival. External catering in Holland had a penetration rate of 47% of the
available opportunities and continued growth was forecast over the next five years.

The French business operated 329 contracts out of the total market of 9,000, a 3.7%
market share. The small market share and intense competition in the French market had resulted
in Tiller performing below plan in France. Operational changes reportedly had been made and the
company expected its French business to improve. Penetration in France by contract caterers
was roughly 35% of all opportunities.

In the U.S., Tiller Foodservices had a relatively small market share overall, but a
significant market share in the Northeast, between Boston and Washington. The company’s
operation in the USA was up-market when compared to the U.K. Penetration by contract
caterers in the overall U.S. market was almost 85% of all opportunities, much higher than the
penetration in the European markets.

Specialist Catering and Kelvin

Tiller’s Specialist Catering and Kelvin divisions were both the market leaders in their
respective markets. Kelvin’s market share had grown from 26% since 1985. Its largest
competitor, SAS, had a 10% market share. Because it operated in a depressed business --
catering to offshore and onshore oil related installations – Kelvin did not forecast much
improvement for several years.

Cinven and Tiller Foodservices 6

Management and Employees

Tiller Foodservices had 43,500 employees, the vast majority of whom were employed at
the individual contract sites. Although these employees were technically Tiller Foodservices
employees, their costs were met by the client within the framework of the individual contract.

The senior management team was structured so that managers had operational and
functional responsibilities. See Exhibit 5 for a list of the Tiller management team. Tiller’s CEO,
Gary Hawkes joined the company in 1963 and became CEO in 1978. In 1982, he was named a
director of Luxe.

The other members of Tiller’s management team also were very experienced, with many
of its senior managers having over 20 years service with the company. Each of the individual
overseas countries had managing directors and complete management teams as did Kelvin and
Specialized Catering.

5. The Proposed Transaction

In early 1992, Tiller Foodservices’parent, Luxe PLC, decided to sell Tiller Foodservices
in order to reduce Luxe’s debt load and focus on its core business of luxury hotels. In the first half
of 1992, Luxe considered a number of ways to divest Tiller. First, Luxe considered spinning
Tiller off to Luxe’s shareholders. Because the spinoff would not provide much cash to Luxe for
debt repayment, Luxe decided to pursue a sale.

Initially, Luxe entered into exclusive discussions with KKR, the largest U.S. buyout fund.
After signing a nonbinding agreement with KKR, however, two of Tiller’s competitors, Compass
and ARA approached Luxe with a higher offer. Compass competed with Tiller in the U.K. and
Europe while ARA competed with Tiller in the U.S. Luxe ended its negotiations with KKR and
began negotiating with Compass / ARA. After reaching an agreement in principle, this deal, too
fell apart, this time over legal issues.

So in September of 1992, Luxe found itself in the position of wanting to sell Tiller, but
having failed to close two attractive offers.3 It was shortly thereafter that the Cinven team
approached Luxe. Cinven had a close relationship with Luxe’s CFO, Donald Main. Cinven
offered Luxe confidentiality, a speedy transaction, and no embarrassment. Luxe agreed and
offered Cinven access to Tiller’s financial statements. One week later, Cinven proposed a
transaction price of £402 million. The deal was conditional on satisfactory results from due
diligence and discussions with Tiller management.

Cinven hired Bain & Company, the prominent consulting firm, to help with the due

3
According to press reports, two additional offers also had failed to materialize – one from Citicorp Venture Capital
and one from Sodexho, a French competitor in the contract catering business.

Cinven and Tiller Foodservices 7

diligence. During this due diligence, Cinven and Bain uncovered some opportunities and failed to
uncover any skeletons. In particular, Cinven felt that Tiller’s geographic coverage could be
expanded to the U.S. from its existing base in Europe. Based on the due diligence findings,
Cinven constructed post-buyout forecasts for Tiller which are presented in Exhibits 6-8.

Pros and Cons

Langmuir, Linden and Wheeler were largely positive about the transaction. These
positives included:

. Tiller had generated cash rather predictably, even through the recent recession.
. Tiller’s management team was very capable, but had been insufficiently incentivised.
(As part of the buyout, 1,000 Tiller managers would invest £2 million in the buyout.)
This provided the potential for significant cost savings and working capital reductions.
. Tiller was the market leader in the U.K. and Holland where the catering market was
expected to grow. In other regions, Tiller had considerable scope for development.
Overall, the Cinven team thought there were considerable opportunities to grow.
. Tiller had invested a considerable amount in systems in the previous several years such
that Tiller could grow revenues with relatively modest increases in costs. Furthermore,
Tiller could reduce its capital expenditures relative to previous years.

The Final Decision

At the end of 1992, then, having completed its due diligence, the Cinven team put together
the £402 million transaction detailed in Exhibit 9. A debt syndicate led by Bankers Trust would
provide £200 million of senior debt to the transaction. The institutional investors would invest
£200 million in a mixture of discounted debt, preference shares, and common equity. £62 million
of the institutional money would be invested by Cinven’s clients and £60 million by Luxe. Cinven
intended to syndicate the balance. Finally, management would contribute £2 million. The
institutional investors were to receive 80% of Tiller’s equity while management would obtain
20%. As the final closing of the deal approached, the three Cinven partners – Langmuir, Linden,
and Wheeler – wondered whether this transaction was as attractive as they had initially thought.
(Exhibit 10 provides capital markets and comparable company information.)

Cinven and Tiller Foodservices 8

Exhibit 1
Cinven-led Investments 1986-1992

Cinven and Tiller Foodservices 9

Exhibit 2
Cinven Team

Cinven Management Team in 1992

Robin Hall, Managing Director (age 43)

Robin qualified as a chartered accountant in 1972, and subsequently specialized in the computer
and electronics sectors. He joined Cinven in 1981 from the British Technology Group, became
Deputy Managing Director in 1985 and was appointed Managing Director in 1988. He and the
Deputy Managing Director have overall responsibility for the direction and development of
Cinven's investment management activities, including defining strategy, resources and relations
with investors.

John Brown, Deputy Managing Director (age 39)

John is a graduate of Oxford University and a chartered accountant. He previously worked as an

investment executive for the Greater London Enterprise Board and as a consultant at the
Economist Intelligence Unit. He joined Cinven in 1984 and was appointed Deputy Managing
Director in 1988.

Jonathan Clarke, Director (age 34)

Jonathan is a graduate of Oxford University and a chartered accountant. He joined Cinven in

1989 from KPMG, where he worked on venture capital transactions.

Guy Davison, Director (age 34)

A Cambridge University graduate, Guy qualified as a chartered accountant with KPMG, where he
was responsible for the international audit of Nestle SA. He joined Cinven in 1988 after four
years working for Larpent Newton, an independent venture capital company. Guy led Cinven's
investments Holmwoods.

Andrew Joy, Director (age 35)

A graduate of Oxford University, Andrew spent six years as a director of Causeway Capital, and
was then appointed managing director of Hill Samuel Development Capital. He joined Cinven in
1992.

Graham Keniston-Cooper, Director (age 33)

Graham is a graduate of Cambridge University. He joined Cinven in 1992, after spending six
years at Kingfisher as head of business development. Previously, he worked for the Boston
Consulting Group.

Cinven and Tiller Foodservices 10

Exhibit 2 - Continued
Cinven Team

Hugh Langmuir, Director (age 36)

Hugh is a graduate of Edinburgh University, Harvard and London Business School. Before
joining Cinven in 1991, he spent six years working for Citicorp in London and Paris, and five
years with Bain & Co.

Brian Linden, Director (age 35)

Brian is a graduate of Greenwich University and is a chartered accountant. Brian joined Cinven in
1985 from Deloitte & Touche.

Andrew Marchant, Director (age 36)

Andrew is a graduate of Exeter University and is a chartered accountant. Before joining Cinven
in 1988, he was an executive at Prudential Venture Managers and a Partner at Schroder Ventures

Dick Munton, Director (age 36)

Dick is a chartered engineer and holds an MBA from the London Business School. He joined
Cinven in 1987, and led the investment in Sharelink.

Charles Nicholson, Director (age 39)

Charles is a graduate of Bristol University and is a chartered accountant. He was previously a

Director of Morgan Grenfell, where he worked for 12 years, including three years in New York.
He joined Cinven in 1991, and in his first six months arranged and negotiated the management
buyout of Data Sciences from Thorn EMI

Simon Rowlands, Director (age 34)

Simon is a chartered engineer and holds an MBA from Cranfield School of Management. He
joined Cinven in 1986 after spending five years with an international engineering consultancy.

Brent Wheeler, Director (age 40)

Brent is a graduate of Essex University and is a chartered accountant. He joined Cinven in 1991,
having previously worked in venture capital at 3i and Security Pacific Hoare Govett.

Cinven and Tiller Foodservices 11

Exhibit 3
Number and Value of Buyouts by Country
1989 1990 1991 1992 Total 1
Number of Value Number of Value Number of Value Number of Value Number of
Buyouts (US$M) Buyouts (US$M) Buyouts (US$M) Buyouts (US$M) Buyouts
United States 308 74,400 197 15,180 218 7,030 270 9,600 993
United Kingdom 523 12,051 597 5,992 567 5,309 586 4,931 2273
France 130 1,145 150 3,470 120 2,245 110 1,488 510
Sweden 37 1,260 44 1,421 37 614 36 426 154
Italy 23 578 29 675 23 683 15 454
Germany 25 779 36 563 27 419 52 487 140
Netherlands 53 356 36 243 42 608 49 440 180
Switzerland 21 161 15 409 18 247 31 178
Denmark 53 337 38 384 6 125 7 132 104
Spain 12 112 12 164 9 135 13 351
Belgium 13 127 8 187 8 116 13 76
Finland 16 117 26 150 21 155 35 70
Austria 5 128 8 96 10 150 5 100
Norway 8 19 9 254 5 24 8 36
Portugal 0 0 4 29 2 7 3 203
Ireland 12 32 16 116 5 19 6 36

Continental Europe 38 5,452 41 8,161 28 5,547 32 4,476 139

Source: Note on European Buyouts, Harvard Business School, December 15, 1995

Cinven and Tiller Foodservices 13

EXHIBIT 4
Number and Value of U.K. Buyouts and Buy-ins

Number of U.K. Buyouts and Buy-ins

600

Buy-outs
500
Buy-ins

400
Number

300

200

100

0
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992
Year

Source: Management Buyouts, Quarterly Review from the Centre for Management Buyout Research, Autumn 1997,
University of Nottingham

Value of U.K. Buyouts and Buy-ins

4,500
4,000 Buy-outs
3,500 Buy-ins
3,000
Value (£m)

2,500
2,000
1,500
1,000
500
0
79

80

81

82

83

84

85

86

87

88

89

90

91

92
19

19

19

19

19

19

19

19

19

19

19

19

19

19

Year

Source: Management Buyouts, Quarterly Review from the Centre for Management Buyout Research, Autumn 1997, University of
Nottingham

Cinven and Tiller Foodservices 14

Exhibit 5
Tiller Foodservices Team

Operational Responsibility Functional Responsibility

Gary Hawkes Managing Director -
Iain Carslaw Finance Director -
Rod Simpson USA, Australia, Far East -
Ian Hall Personnel Director -
John Warres Kelvin, Specialist Catering MOD & NHS work
Alan Reed Contract Catering U.K. Client Accounting, Education
North
David Ford Contract Catering U.K. Sales
South
Peter Hazzard Contract Catering Scotland, Purchasing, Food Service,
Ireland Training
Jans Rijnerse Holland and Germany -
Marcel Jacobs France, Belgium and Spain -

Cinven and Tiller Foodservices 15

Exhibit 6
Tiller Foodservices P&L

Cinven and Tiller Foodservices 16

Exhibit 7
Tiller Foodservices Balance Sheet

Cinven and Tiller Foodservices 17

Exhibit 8
Tiller Foodservices Sources and Uses

Cinven and Tiller Foodservices 18

Exhibit 9
Proposed Deal Terms

Uses:

Cash to Luxe £390.0 M

Expenses £ 12.0 M

Total £402.0 M

Sources:

Security Amount
Senior Bank Debt £200.0 M
Equity
Institutional Deep Discounted Bonds £100.0 M
Institutional Preference Shares £ 98.2 M
Management Preference Shares £ 1.8 M

Institutional Equity £ 1.8 M 80.0%

Management Equity £ 0.2 M 20.0%

Total £402.0 M 100.0%

Bank Debt Interest Rate: LIBOR + 2.25%. (LIBOR was 6.25% in December 1992).

DDB Interest Rate: 17%. Payment-in-kind in years one and two.

14% payment-in-kind and 3% current yield after year 2.

Preference Shares Dividend Rate: 6%. Payment-in-kind in years one and two.
Cash after year 2.

Valuation: £402 million representing a capitalization of 11.0 times EBIT in 1992.

Monitoring: The Institutions will have the right to appoint two non-executive directors

Cinven and Tiller Foodservices 19

Exhibit 10

Capital Markets Information

Cinven and Tiller Foodservices 20