Long before Press Up, their Dublin-consuming restaurant company, Paddy McKillen Jr and Matt Ryan were business partners. 

As young lads they valeted cars and delivered Christmas trees. They shared a job as a courier. They looked at importing spirits for pubs, and launching a new brand of green tea. In a radio interview, Ryan said they “were out to make a notable go at the [business] world”.

McKillen Jr being the son of McKillen Sr, they didn’t want for entrepreneurial backing. In 2007, senior offered them a contract to manage two of his restaurant businesses, Captain Americas and Wagamama. 

They made a decent go of it. Today there are 46 restaurants bars and hotels in the Press Up group, employing 1,700. There’s talk of 15 more openings next year and international expansion. 

Less conspicuous than Press Up is Oakmount Development, Ryan and McKillen’s property development business. Oakmount is opaque. But in the past two years it’s been involved in some huge deals: the €27 million sale of a block on Lennox Street, the €10.5 million sale of a site in the Liberties, an €80 million scheme to develop apartments on a site it bought for €30 million in Blackrock, a big share of the €60 million paid for Clery’s, €20 million for the New Ireland building on Dawson Street, a €17 million loan for the development of the Mayson on the north quays. There are dozens more for which we don’t have figures, like for example the conversion of Howl at the Moon into a 52 bedroom hotel.

Oakmount, then, is a huge business in its own right. At normal margins for the property development industry, it would be expected to make millions or tens of millions in profit.

Press Up, its sister business, only made €844,000 profit in 2018, the most recent year for which we have figures. And 2019 can’t have been much fun. Twice, the company lined up a stock market flotation, only to pull the IPO. A plan to raise €50 million through selling a minority stake was also abandoned.

So why do McKillen and Ryan, who are businessmen first and foremost, bother with the hard work of running a moderately profitable restaurant, bar and hotel company? Why not just build office blocks?

Press Up grew out of the recession. Its first big deal was in 2010 for The Workman’s Club, a pub and music venue on the south quays, followed by the Liquor Rooms the same year. By the end of 2014 it had 495 employees at 17 locations. As we’ve seen, today it has 1,700 employees at 46 locations. In August, the company spoke of its plans to open a further 15 locations this year and next. 

Most Press Up places have their own look and their own branding. But there’s definitely an aesthetic. They go for soft lighting, beautiful tiles or parquet floors, and velvet. The paint looks expensive. Everything looks expensive. Restaurants get girls’ names, pubs get boys’ names. 

The Stella is their crowning glory. An old theatre in the centre of Rathmines, for decades it lay derelict. At great expense, Press Up revived the space as a plush cinema, cocktail bar and restaurant. The Paddy McKillen influence is strong — speaking to the Irish Times, Ryan credits McKillen with a “fabulous design eye” and a “very keen eye for revolutionary construction”.

Like many Press Up places, The Stella is big. Press Up uses size as a competitive advantage. In the radio interview, Ryan said: 

“The modern-day restaurant needs to be large because a large quantity of the bookings coming in now are corporates: Googles, Twitters, LinkedIns, WeWorks. A lot of these people will book a 200 person dinner for the new personnel… it’s also important to remember that nearly 70 per cent of a week’s trade is done between a Friday evening and a Sunday closing of brunch. Which means that you need to be able to take the numbers in that window, or you just won’t be able to maximise the capital.”

The Press Up model, then: grow quickly, grab big premises, spend heavily on fit-out. Industry sources say a spend of €150-200 per square foot would be normal for the industry, whereas Press Up spends €200-250.

Profit: €12 million or €844,000?

Press Up’s accounts for 2018 show a company with the pedal to the floor. Its revenues are up by 22 per cent on 2017. Employee numbers are up 63 per cent to 1365. Ebitda, a measure of profit which excludes depreciation, interest payments and tax, is up 61 per cent to €12 million. 

Ebitda is the Press Up group’s preferred measure of profitability. It’s an approximation of operating cash flow. The advantage of Ebitda is it shows the ability of the company to make money in the here-and-now, without reference to investment in the future, or interest payments. 

There’s a real question, though, whether Ebitda is the right measure of Press Up’s profitability. After depreciation, interest, exceptional items and tax, that €12 million figure shrinks right down to €844,000. 

Press Up sources have argued that these charges are a byproduct of Press Up’s growth — that as soon as the company stops growing, the net profit figure will swell. I’m not so sure.

I’ll go through the charges one by one. Taking the exceptional items charge first, €2.6 million of that €4.1 million is made up of one-off costs associated with opening new businesses. To that I say, fair enough. When Press Up stops opening new places, that will disappear. It’s a legitimate cost of growth.

Then take the interest payment of €1.46 million. Press Up’s growth has been fuelled by borrowing, mostly from AIB. It owes AIB €27.8 million. The interest charge which shows up on the income statement covers only the interest on those loans. Starting in 2021, the principal comes due: €15 million in 2021, €12.8 million in 2022. All going well, one would presume those loans would be refinanced. That’ll work fine — as long as there’s no major slowdown. And the interest payments are going nowhere, whether or not the company chooses to stop growing.

The final and most controversial number is the depreciation charge. Depreciation is how capital expenditure shows up on the income statement. To take one example, industry sources say Press Up spent €2 million on fitting out The Lucky Duck cocktail bar on Aungier Street in 2018. That €2 million cost didn’t show up in Press Up’s income statement in 2018. Instead, the cost got spread over the working life of the asset. In the case of a fit-out, it’s spread out over eight years. So the €2 million Lucky Duck fit-out shows up on the income statement in 2018 as a €250,000 depreciation charge. 

Depreciation is critical to understanding Press Up. The company says it shouldn’t be taken into account. If you agree with them, it’s solidly profitable. But that seems wrong to me. 

Depreciation is an accounting charge, not a cash charge. But it’s the mirror image of a real cash charge — capital expenditure. And capital expenditure (big bars, fancy fit-outs) is an essential part of the Press Up model. The company has invested a total of €52.4 million in tangible fixed assets to date, €15.8 million of which was in 2018. By focusing on Ebitda and ignoring depreciation, you’re ignoring the vast capital spend which made the earnings possible.

The question hinges on how quickly the assets really do depreciate, ie how long before they need to be replaced. The €5.5 million charge above assumes they need to be replaced every eight years. Press Up maintains that, even though they’re being depreciated over eight years in the accounts (standard practice for restaurant industry fit-outs), in reality, their restaurants and bars are fitted out to such a high standard that they’ll last much longer. A Press Up source says, “Its a lot of money for depreciation, but depreciation isn’t a huge element of the cost structure. Because fit out is high quality.”

There’s no doubting the quality of the fit-out in Press Up’s locations. But quality only gets you so far in the restaurant business, where the customers are capricious. One experienced Dublin restauranteur says of it, “The depreciation charge is what gets you. Once you start that clock, you’re on the hook for it.”

Warren Buffet has a thing about depreciation:

“Depreciation is the worst kind of expense: You buy an asset first and then pay a deduction, and you don’t get the tax benefit until you start making money. Trumpeting Ebitda is a particularly pernicious practice. Doing so implies that depreciation is not truly an expense, given that it is a “non-cash” charge. That’s nonsense. In truth, depreciation is a particularly unattractive expense because the cash outlay it represents is paid upfront, before the asset acquired has delivered any benefits to the business.” 

Press Up might argue the depreciation charge is an artefact of its high-growth period, and that once it takes the pedal off the floor, and reduces capital expenditure, the number will level off and then fall. But that doesn’t tally with the rest of the industry. Aaron Allen, a consultancy, has analysed the financials of publicly traded restaurant groups. It finds that even the slowest-growing quartile of restaurants spent 5.8 per cent of their revenue on capital expenditure each year. The fastest-growing quartile spent  an average of 10.4 per cent (remember, depreciation is the mirror image of capital expenditure). In Press Up’s case, that’s a range of €4.1-7.3 million per year, just to keep up. Which is roughly the same as its depreciation charge today.

If the depreciation and interest charges are going nowhere, what’s the fair measure of Press Up’s long term profitability? It seems to me the only figure in the income statement that could be said to be distorted by growth is the €2.6 million cost of opening new places. Apart from that, net income does the job.

Industry comparisons

How does Press Up compare to the rest of the industry? Aaron Allen, a consultant, has crunched the numbers. 

Among publicly traded restaurants, the median net income margin in 2017 was 5.7 per cent. The top quartile made 7.8 per cent. Press Up’s net income margin, by comparison, was 1.2 per cent. Publicly traded restaurants spend an average of 29 per cent of revenue on staff. Press Up spent 32 per cent. The average restaurant makes €1,810 in profit per member of staff; Press Up made €618. Even Press Up’s preferred measure, the Ebitda margin, doesn’t compare well. It made a 16.9 per cent Ebitda margin vs the 20.6 per cent NYU’s Stern School of Business says is average for listed restaurants.

Why is Press Up less profitable than the listed restaurant businesses? Well, big restaurant companies don’t look much like Press Up. Big restaurant companies usually have one brand and one concept. They find a formula that works, and then they roll it out again and again. That gives them economies of scale. That gives them more bang for the buck in terms of marketing, fit-out, terms from suppliers, and focus. 

Without a single proven formula, Press Up is back to the drawing board every time it wants to open a new outlet. It’s got to figure out decor, pricing, menu, marketing. And then when the businesses are established, they’re harder for management to keep an eye on. Ideally management could keep track of a small number of key performance indicators, and use them to run the business. An analysis by Aaron Allen shows that restaurant businesses with three brands or more have net margins of 3.3 per cent on average, compared to 5.1 per cent for those with one brand. Aaron Allen says, 

“With a lower number of brands, not only can the executive team focus on properly developing the concept, but they also aren’t required to track sales, growth, revenue, loss, turnover, and other KPIs across different brands, cuisines, and segments. As a result, multi-brand portfolios appear to struggle to deliver year-over-year growth, and many of their brands cannot develop to their fullest potential. Our data supports the notion that more focused portfolios are better able to deliver strong returns on both a brand level and as a group.”

So multiple brands are harder to manage. They also cost more to grow. In 2017, listed UK restaurant companies were aggressively expanding across the country. They each had one or two restaurant concepts. A pseudonymous analyst called The Naked Fund Manager crunched the numbers on their roll-out strategies, looking at at how long it took them to recoup their capital investment. He found that it took an average of 2.7 years for each new unit to recoup its initial capital investment. For Press Up, the equivalent number is four years. 

It’s clear Press Up is looking for a restaurant formula it can roll out. It’s already got Wagamama and Captain Americas. In 2017 it bought Elephant and Castle, which it has since rolled out to Rathmines, Monkstown and Sandyford. It’s started rolling out Wow Burger, a burger shop, across Dublin city. And the Dean hotel brand is on its way to Cork and Galway, with talk of international expansion. 

Judged purely as a restaurant group, Press Up doesn’t really hang together. It has too many brands, its capital expenditure is high, and its margins are low. But it must be remembered, Press Up is not McKillen and Ryan’s only company. It seems like Press Up does an important job for their other company, Oakmount. 

The big picture

Of the 46 Press Up businesses, 37 occupy premises owned by Oakmount or the McKillen family. So the two companies are separate, but symbiotic. 

An experienced Dublin developer speculates that it’s likely Press Up restaurants and bars have the effect of boosting the value of Oakmount properties. 

He says Press Up outlets make more desirable occupiers than ordinary restaurants. They’re professionally managed, they pay their rent on time, and should something go wrong they can draw on the strength of the wider group. 

Because a Press Up tenant is more desirable than an ordinary tenant, owners are willing to accept a lower yield to get them in. And for a given amount of income, a lower yield means the building is more valuable. So Oakmount can buy a building, stick a Press Up in it, and make money both on the Press Up operating income and the capital gain on the building itself. 

According to one source: “Looking at it from the outside, that’s probably one part of their strategy. Pubs and nightclubs are selling at yields of 7-8 per cent, whereas Press Ups are selling on yields of 4-5 per cent. That’s almost double the value. That’s a fifty per cent increase in the end value of the building.”

I’m speculating here, since unlike Press Up, Oakmount doesn’t publish its accounts. To know for sure we’d need to see market evidence where Press Up properties have sold and achieved a 4-5 per cent yield in the same location and similar building quality to a competitor who’ve traded at 7-8 per cent. What is clear is that Press Up is not the whole picture. For example, McKillen and Ryan are directors of Oval Target, an unrelated-to-Press-Up company about which little is known except that it has approximately €30 million of “trading properties” and €30 million in loans. 

It seems likely Press Up’s relationship with Oakmount and other related companies would have been a factor in its cancelled IPO. Stock market investors don’t like related party transactions — ie, a manager of a public company dealing with another company in which they have an interest. In Press Up’s case, McKillen and Ryan would be both the occupiers and owners of 75 per cent of their properties. It would have been messy. How would rent negotiations have worked, for example?

A bigger question is, why go public at all? In the past, companies went public to get cheap funding. But that’s less a motivation than it once was, since cheap funding is now available on the private markets. Press Up has had no problems here. It’s been able to fund itself at 3.65 per cent, which is lower than the 4.18 per cent average cost of debt for big listed restaurant companies, according to NYU Stern. 

Then there’s the hassle. 16 staff were brought on by Press Up specifically to help with the IPO, along with a new specialist CFO from Greencore, Emma Hynes. When the deal fell through, the sixteen roles were made redundant and Press Up parted ways with Emma Hynes.

In fact, the trend has been for public restaurant companies to go private rather than the other way around. Aaron Allen calculates restaurant businesses worth $14.4 billion have gone private in the last two years, compared to companies worth $59 million going public in the same time frame. One wonders why has Press Up tried twice to sell off 45 per cent of its equity this year. 

Why run a restaurant business? It’s hard work. But it pays a salary and it entitles you to a share of €844,000 in profits. Then there’s the glory factor. Press Up has built a legacy to be proud of in Dublin. It has given the city beautiful new hotels, cinemas, restaurants and bars.

But for McKillen and Ryan, I suspect there’s more to it. If their Press Up operating businesses lower the yield — and increase the value — on the 37 buildings they own, then the €844,000 doesn’t matter much in the scheme of things. And if they’re right about not needing much capital expenditure in future, there’s a good chance Press Up will become a nice profit centre in its own right.  

The risk is that they’re wrong about capex, and the flighty diners of Dublin move onto the next thing in a couple of years’ time. In that scenario — or one of an economic slowdown, or trouble refinancing the debt — Press Up, with its tiny margins, hasn’t given itself a lot of room to work with.