M&A activity in the tenanted pub sector won’t return to normal until pub companies can demonstrate that their tenants are making a decent living, according to Peter Hansen, founder of mergers and acquisitions advisor Sapient Corporate Finance.
Speaking at the Tenanted Pub Company Summit, organised by M&C Report and Publican’s Morning Advertiser, Hansen said private equity is interested in the sector but is deterred by the cost of investing and the lack of information about tenant profitability.
Hansen, who advised RBS on the sale of the 918 pubs to Heineken last year for £422m, said: “We talk to private equity all the time about the pub industry.
“There are plenty of people who have made money out of tenanted pubs before. They’re not afraid of them, they’re looking at prices now that are very attractive.
“They are starting to look at the published results of people like Young’s, Fuller’s, and Marston’s and think, oh, trade is starting to turn around, it’s a good time to get back in.
“But the deals are just too expensive and require too much equity right now.” He said a 50/50 split between debt and equity is common.
Hansen said that for the Heineken/RBS deal, Sapient created a financial model to measure tenant profitability.
“What really bothers me is [investors] don’t understand tenant profitability.
“They know about tenant costs, they’re not stupid. What they don’t understand is, how can you not know the profits of your tenants, and if you don’t know the profits of your tenants, how can we assess whether this business really is stable? That’s a very big issue for any investor.”
He added: “I don’t think we’re ever going to go back to the days when we can sell tenanted pubs without providing insight into how much money the tenant is making.
“It’s a plea almost to all of the pub companies. If you don’t know how much your tenant is making, you don’t understand the sustainability of your estate.
“If you can’t grow your profits and demonstrate that your tenants are making a decent living, we are not going to have this market return to normal.”
He added: “You may see one pub package deal this year if there’s an acceptance of what needs to be done. But we may not see another package deal for several years.”
Hansen said while debt to equity ratios remain around 50/50, sale values would “struggle” to get around 6x outlet EBITDA. The industry could return to nearer 8x EBITDA with “better debt conditions”, he predicted.
