Simon Johnson of CBRE’s Corporate Advisory team looks at how managed pubs distinguish themselves from their restaurant cousins in the casual dining space and analyses the detail of the takeover of Punch.
The recommended bid for Punch Taverns by Vine Acquisitions Limited is currently with the CMA awaiting clearance around the Heineken deal to acquire the 1,895 pubs in Punch A. Assuming that the deal is not blocked – what does this tell us about the value of these pubs?
Trawling through the offer documents and making some assumptions, it would appear that at the offer price, Vine is buying Punch at a multiple of around 10x group EBITDA – or 8.4x unit EBITDA.
However, this gives no flavour to the complexity of the deal, or indeed the many moving parts within it. At its simplest, Heineken would seem to be acquiring its 1,895 pubs for around £1.2bn (we assume that all the interest rate swaps are within Punch A) – or 9.2x unit EBITDA and around £635,000 per pub. What Heineken is not acquiring any management above the pub level – and has said that there will be a mixture of transitional support from Punch, potential people movements across and will be using its own network and resources.
What remains is more difficult – certainly there will be around 1,381 pubs (the majority in Punch B) for which Vine will have paid around £573m before costs, but this also includes the whole of the current plc infrastructure – for good or for ill.
Vine has stated that with a smaller portfolio, there will be opportunities to cut the overhead, as well as the opportunities that will come from managing the portfolio even more intensively over the next few years.
We also expect disposals from both sides once the parties have had the chance to revisit and restructure the securitisation vehicles. It is interesting to note that with such high levels of debt the securitisations represent nearly 80% of the value of this deal. And there are plenty of parties lining up to get involved.
Ask a managed pub operator whether they are competing in the casual dining space and our experience is that it depends on how the casual dining space is doing! The pub is now the most popular destination for eating out in the evening and 37% of Britons visit pubs most regularly, ahead of restaurants and fast food outlets. (Source: Greene King Leisure Spend Tracker).
There are enough similarities for heavy discounting or cyclical downturns to have an impact on both, but most pub operators point to the unique benefits around beer and wider socialising that a pub enjoys compared to a restaurant.
However, both are competing for similar parts of consumer spending – and both are seeing the effects of cost headwinds in broadly equal ways. So how do managed pubs distinguish themselves from their restaurant cousins?
We believe that the difference lies in the real estate. Press reports have noted the ‘re-boot’ of the sale process for 29 sites previously operated by The Restaurant Group but now surplus to brand and company requirements. In many cases premiums are being asked for and there may be opportunities for other operators with brands more suited to those sites.
However, in similar situations in pubs this rarely occurs. Granted JD Wetherspoon, Greene King and M&B are all in the process of selling tails, but in the first two of those, business is brisk and we expect there to be good interest in the 75 or so M&B sites.
But as the asset owner, the onus and opportunity is often in repositioning the pub. We note the early success of converting Harvester pubs to Miller & Carter units, the progress that Ei Group is making with its Managed Expert division giving new and vibrant life to many pubs and the plans that Greene King has for many of the acquired Spirit sites.
Whilst we recognise that not every repositioning works we expect to see much more noise in the coming months on how operators are distinguishing managed pubs from their restaurant competitors in a very competitive market.