Reports that Punch Pubs & Co is exploring a £1bn sale were another shot in the arm for a pub sector which is showing further signs of a return to deal-making.
According to Sky News, Fortress Investment Group is one of a number of parties believed to be in discussions with the pub company about a sale.
One industry insider told MCA that while Fortress can’t be assumed to be the front runner, the story was undoubtedly a leak aimed at stimulating further interest.
“They are clearly in discussions with someone else. It’s designed to say to the market: ‘come and get me’,” the soured told MCA.
A cynical take would be that Fortress’s name could be used as bait due to its high-profile involvement in the bidding process for Morrison’s earlier this summer.
“Everybody knows Fortress has a lot of money,” the source said. “Punch are trying to get the best price for the company… They clearly want £1bn for it – will they get it? Let’s see.”
Consideration of a sale will clearly be driven by a desire for backers to realise value, but it would also give Punch firepower for future acquisitions, the source added.
Only a few will be party to the detail around the discussions, but it’s another example of the unwavering appeal of the great British pub – particularly to international investors.
Despite the pandemic resulting in the pause button being pressed on many a business plan, notable transactions so far this year have included Liberation buying 21 pubs from Wadworth, Red Oak taking 10 tenanted & leased sites from Wells & Co, Marston’s acquiring eight pubs from S A Brain, and Punch’s acquisition of Young’s 50-strong tenanted estate, Ram Pub Company.
These deals were dwarfed by Admiral Taverns’ acquisition of Hawthorn’s 674-strong community pub estate.
Speaking at MCA’s Pub Conference in September, Simon Johnson of CBRE said such deals illustrated buyers’ high level of confidence in the pub market, particularly for wet-led pubs, which he suggested may have been historically under-valued.
Johnson said despite initial worries at the start of the pandemic that lockdown would lead to pubs becoming distressed assets, those fears did not come to pass, with the sector on the receiving end of fevered interest from US investors looking to buy into the sector.
Punch on paper
Founded in 1997 by Hugh Osmond and Alan McIntosh, Punch Taverns and built up its estate before it listed on the stock exchange in 2002. In the proceeding years it acquired various brands, including Pubmaster, Innspired Group and Avebury Holdings, building its estate to around 3,200 pubs – the largest pub operator at the time.
Now led by CEO Clive Chesser, the current Punch estate stands at around 1,300 pubs.
Backed by Patron Capital Partners and May Capital, its current shape was formed with the sale of 1,900 pubs to Heineken’s Star Pubs & Bars in August 2017, in a £305m deal, which saw the formation of the Punch Pubs & Co.
According to Punch, the deal gave it the firepower to invest £90m into its estate over the subsequent three years, as well as develop its training academy and development kitchen.
Speaking at the time, Keith Breslauer, managing director of Patron Capital, said the completion of the complex deal “paves the way for an exciting future for Punch as a more focused business”.
“This is a company that has undergone a number of challenges and distractions in recent years but has a portfolio of high-quality pubs with excellent future potential.”
Fast forward several years, and the impact of lockdown restrictions, and 2021 has so far seen it secure a £600m bond refinancing deal, quickly followed up by an announcement that it was to acquired Young’s tenanted estate for c£50m.
Its prospectus for the bond issue valued its real estate portfolio at £850m, while Sky News said that one analyst had suggested its overall enterprise value could be in the region of £1.5bn.
MCA understands the enterprise value multiple works out at between 10-11x Punch’s run rate.
According to Mark Brumby from Langton Capital, the move suggests that Fortress considers UK property to be undervalued and that the approach has a direct read-across to other UK pub groups.
“If Punch were to change hands at these prices, then valuations across the sector are perhaps too low,” he suggests.
What would Fortress bring to the table?
Fortress is US-based investor owned by Japanese tech investor SoftBank – whose CEO Rajeev Misra recently undertook a personal investment in the Lewis Hamilton backed vegan chain Neat Burger.
Founded in 1998, Fortress has $53.9bn worth of assets under management, as of June this year. Starting life as a PE firm it expanded into a global investment manager and was acquired by SoftBank for $3.3bn in 2017.
Fortress already has UK interests. It acquired Majestic Wine in August 2019 and were a frontrunner to acquire a package of about 150 leased and tenanted pubs from Marston’s in 2019 for an estimated £45m. It was also in the running to acquire Morrison’s earlier this year.
Strength in the market
There is a lot of money in the US, particularly in real estate funds, and as pubs have proven so resilient during the downturn caused by the pandemic, they are of keen interest to investors.
“One of the things the likes of Punch have shown is that the tenanted and leased model is not dead – there is still opportunity there,” notes Peter Martin, contributing editor MCA.
While there is some current nervousness around the new Covid variant, post lockdown people want to go out, says Martin. “The sector is still vulnerable, but less vulnerable than other sectors.” There are also options when it comes to investing in or purchasing a company like Punch – do you continue to run it as it is or are there some potential break up options in there as well?
“These sorts of pubs will always attract interest because they are a pretty safe bet.”
Graeme Smith, MD, hospitality and leisure at AlixPartners said Fortress’ interest in Punch shows the attractiveness of pub assets in terms of income yield and real estate asset value.
“This should be positive for pub valuations as it represents a new well capitalised investor entering the market who we would expect to invest further in Punch as a consolidation platform.”
While the outcome of Punch’s sale talks is far from certain, Hugh Osmond, co-founder of Punch and director at Osmond Capital tells MCA it is good news for the pub sector.
“I think the stage is well set for a real revival of pubs and the newer hybrid franchise-type models look like a much better way of giving pub landlords partial autonomy over their pubs and P&L,” he says. “So it could be a good investment for Fortress.”
