Compass: results to exceed projections: stock price climbs following the announcement and speculations of a takeover

Nation's Restaurant News,  April 9, 2007  by Elissa Elan

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LONDON -- Citing improved operations and cost cutting, Compass Group PLC provided guidance in late March that revenue growth and margins for the first five months of its current fiscal year are projected to exceed expectations.

The contract management firm said business in its Charlotte, N.C.-based North American division also had been strong during the five-month period. Compass, which in recent years has endured several changes to its executive ranks, government investigations and disappointing earnings, said it expected the positive trend to continue.

Compass's U.S. division includes such brands as Restaurant Associates Managed Services, Levy Restaurants, Bon Appetit Management Co., Canteen Vending Services, Flik International, Morrison Management, Chartwells, Eurest Dining Services and a partnership in the Wolfgang Puck Catering Co.

The announcement from Compass, which said it expects to release full results May 16 for the six months ended March 31, was the latest news to send the company's stock climbing. In recent weeks, rumors that Compass was a takeover target also have buoyed the company's stock and kept observers watching in anticipation.

In mid-March, talk that rival firm Sodexho Alliance of France was interested in acquiring Compass boosted the London-based caterer's stock. Sodexho quickly denied the rumors. Rumors that a Middle East-based company was interested in buying Compass also circulated in late March, sending the stock upward.

In between, Compass' stock dipped after it announced it was under investigation in Portugal for alleged past breaches of competition law. Last year Compass was the subject of a congressional investigation and many lawsuits involving alleged bid rigging of contracts at the United Nations. It said it would cooperate fully with this latest inquiry, which is expected to last several months.

Despite the acquisition rumors, many observers say Compass is more likely to go private than it is to be bought.

"It's pretty unlikely the company is in play," said Karl Green, an analyst for Credit Suisse First Boston in London. "Sodexho already has come out and said the rumors [of a merger] are baseless. Of course, you can't exclude the possibility that they could go private. I can't rule that out."

A possible buyout also received media attention when the Independent newspaper in London stated in a column that Compass's senior management had "had enough" and would "take the company private."

Contract foodservice consultants in the United States said the speculation could signal changes to come.

"There probably is something to it," said Tom Mac Dermott, founder of Kingston, N.H.-based The Clarion Group. "There's only a handful of people in either company--maybe eight to 10 people--who are involved in making those kinds of decisions, so it's unlikely these [acquisition] rumors would have surfaced without someone letting it happen.

"Obviously, it would have to do more with Compass' internal view of its financial situation and whether such a move would be good strategically."

With total revenues exceeding $22 billion, $6.6 billion of which comes from its U.S. division, Compass Group generally is regarded as the world's largest contract caterer. Its current market valuation is estimated at $12.36 billion.

A source close to Compass said: "There is a wall of private-equity money out there, and anything is possible these days. You get these rumors left, right and center. ... They surface every few years, but I attach very little importance to them."

John E. Cornyn, founder and chief executive of the Portland, Ore.-based consulting firm Cornyn Fasano Group, said Compass going private is a likelier scenario than a merger with one of its large allies, such as Sodexho.

"I would question the viability of such a merger because Sodexho is pretty well-integrated," he said. "They're only separated by divisions, whereas Compass is a federation of quasi-independent companies. If you rolled that together, you'd find there'd be an enormous fallout particularly within the [employee ranks]."

eelan@nrn.com

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