A branch of Upper Crust, an SSP brand, at Victoria station in central London © Reuters

Like a good sandwich, SSP once had a value much greater than the sum of its parts. And, like a bad sandwich, it very quickly fell apart.

The travel café operator was built out of British Rail’s catering arm and the in-flight meal business of Scandinavian airline SAS, with 13 years of ownership by caterer Compass stuffing in unloved brands such as Caffè Ritazza. Its proven ability to grab prime sites in transport hubs meant the stock started the year valued at about 25 times forward earnings, a premium to peers such as Autogrill of Italy, even though organic sales growth was below 2 per cent and slowing.

Then, over four weeks to mid-March, the shares lost two-thirds of their value. You know why.

Results from SSP on Thursday are a rear-view mirror on a brutal year. Pre-tax losses for the period ending September totalled £240m as like-for-like sales more than halved. Guidance for the current quarter warned that Covid-19’s second wave in Europe had flattened a fragile recovery.

The signs of strain go well beyond the numbers. SSP cut concession fees it pays by two-thirds but 30 per cent of landlords had not given up minimum guaranteed payments, suggesting tensions across a network where relationships matter. Trading, once it recovers, will need to absorb deferred rents and refit costs. A redundancy programme that sliced 69 per cent off labour costs has the potential to cause lasting problems for a company that often described people as the key to its success.

The pandemic also changes the landscape for concession caterers. Their bargaining power over landlords has weakened, particularly among airport operators who see retail as a way to compensate for the loss of income from airlines. Homeworking poses risks for a UK rail business that last year provided a fifth of SSP’s sales and an estimated 34 per cent of group earnings.

On paper, SSP looks fine to sit tight awaiting recovery for more than a year. Monthly cash burn of between £25m and £30m compares with liquidity of £520m at the September year-end.

In truth, the pinch-point arrives much quicker. Available cash could be wiped out within six months at current burn rates and a £300m loan from the Bank of England, only partially drawn down, needs to be refinanced before February 2022. With break-even improbable in 2021 and management cagey about debt covenant triggers the year after, the odds on another equity issue have shortened.

How have the shares reacted? Positively. A vaccine-induced rally in recent months puts SSP on an even punchier rating than it was pre-pandemic, at about 28 times the 2022 consensus earnings forecast. Recovery potential can justify this valuation eventually but, as befits the Caffè Ritazza owner, better options are available elsewhere for less.

Hanging up

TalkTalk is a broadband company that uses other providers’ lines to give customers a service that, according to disgruntled sorts posting on Trustpilot, is pretty bad. It operates in a tightly regulated market dominated by BT and Virgin and has precious little by way of assets, writes Louise Lucas

Investors may well wonder why major shareholders now want to take it private — but they should certainly be grateful. The Salford-based company brings little more than its 4.2m subscribers and a brand sorely tarnished by a “significant and sustained” cyber attack five years ago.

That explains why talks with trade buyers have come to nought and why the number-four player has failed to participate in this year’s telecoms M&A boom. Instead, Toscafund, run by Tory donor Martin Hughes, is stumping up 97p a share, a 16 per cent premium to where shares were trading before the bid was disclosed in October. Founder Charles Dunstone, who like Toscafund has almost 30 per cent of the company, will roll that into TalkTalk’s new holding vehicle. 

Why so generous? TalkTalk shares had been languishing at a third of peak levels; the bid-fuelled rally brings its enterprise value past £2bn but half of that is debt. It has reported falling revenues and profits in the latest period, not all of which can be pinned on coronavirus. Yet there is no question that Tosca, which last year proffered 135p a share, sees something in the company.

Two possibilities present themselves. Mr Hughes, or the rottweiler as critics (and fans) refer to the tycoon, ostensibly runs a hedge fund but has been known to deploy private equity-style tactics. Case in point: its 2014 £500m buyout of another broadband reseller, Daisy. That playbook could be replicated; note that Mr Dunstone, like Daisy founder Matthew Riley before him, is not selling out. Mr Riley went on to buy out Toscafund five years later.

Secondly, more boldly, the fund may see a way to monetise TalkTalk’s customer base. If it can keep these users on side — not least by investing more in customer service — and woo new ones, that might be enough to pique the interest of trade buyers a few years down the line.

But for now, Toscafund is the only game in town. TalkTalk shares on Thursday broke through the 97p offer price, but only slightly; any hopes of a second bidder are slim. Hanging on makes no sense.

SSP: bryce.elder@ft.com
TalkTalk: louise.lucas@ft.com

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