Analysts’ verdict: Greene King

JP Morgan said it believed the bid represented a very good price. The recommended cash offer of 850p per share, a 51% premium to Friday’s closing price implied 10.0x EV/EBITDA and 13.2x P/E (FY19), said the note. “We believe that this further contributes to establishing a value for the national estates of UK listed pubcos, following the Stonegate bid for Ei Group (EIG) in July. GNK closed at 850p on Monday, exactly at the offer, suggesting a market belief that the deal will proceed.”

The analyst noted that the premium exceeds that of the proposed Ei Group-Stonegate transaction.

“The premium is 51% vs 32% for EIG. However, the premium to the six month VWAP, at 40%, is in-line with the 38% bid for EIG. The EV premium for GNK is 23% vs 12% for EIG.

“All else equal, we believe that a mostly tenanted pub company, such as EIG, should naturally command a higher EV/EBITDA multiple to a pub company with substantial managed house operations, such as GNK (the managed business contributed 81%/74% of GNK revenue/EBIT in FY19). Therefore, we are unsurprised by the gap between the 11.4x EV/ FY18 EBITDA (10.3x on TTM) for EIG vs the 10.0x FY19 for GNK, and in fact consider the GNK bid to be full.”

It said that at this junction it believes another bid is unlikely (but cannot be excluded). “There are few obvious trade buyers, given stated strategies and leverage levels amongst large pub groups. We think an interloper would need to be a financial buyer and we wonder if there are any such buyers with sufficient sector familiarity to move quickly. Moreover, we believe that a higher premium would be difficult to justify,” said JP Morgan.

“The announcement sent shares up across the sector, with this bid representing the second time in as many months that a transaction value has been placed on pub assets. We think the read across is more relevant for MAB and MARS, given their current discounts to NAV and real estate backing. The read across to YNGA and JDW is less obvious, in our view.

“Firstly, YNGA and JDW enjoy premium ratings in the public market. Secondly, JDW’s high leasehold share (c. 40%) means its freehold backing is not comparable to GNK or EIG (81% and 95% freehold/long leasehold share, respectively).”

It has raised its target price by 18% to 850p (dated April 2020), reflecting the bid price for the company, and has left its earnings estimates unchanged.

Morgan Stanley said the bid represented a 23% upside to its prior 690p target price, and it has moved its rating to ‘equal-weight’, and raised its target price target to 850p.

“The 850p bid implies a valuation of 9.2x calendar 2020e EV/EBITDA, in-line with NAV of 850p. The bid represents a 0.5x premium to historical managed pub transactions (last 20 years) and is in-line with the 9.4x EV/EBITDA of Greene King’s acquisition of Spirit Pub Company in June 2015.

“It is below the multiple of TDR/Stonegate’s bid for Ei Group at 11.6x EV/EBITDA, but at a greater premium to the undisturbed share price (38.5% for Ei Group). It is in-line with the 9.5x EV/EBITDA acquisition multiple of Punch Taverns and above the 40% premium offered in August 2017,” read the note.

Meanwhile Goodbody noted that the proposed acquisition brings sector M&A in the last month to c.7.6bn and counting, potentially.

It said that, overall, the offer looks to be an attractive multiple for GNK shareholders representing a 10% premium to its five year average EV/EBITDA of 8.5x and a c.26% premium to Friday’s closing EV/EBITDA.

“At last valuation GNK had c.£3bn of Freehold property value and we had forecast net debt of c.£2bn (table of freehold values in our universe is below),” it said. “GNK had improved operationally in the last 12 months with profit forecasts stabilising, albeit partly aided by good weather and events.

“This is the second large transaction in the sector this summer with Stonegate’s private equity owners having purchased EIG for 11.4x historic EBITDA. The total value of these two deals combined is c. £7.6bn,” read the note.

“This will be overall supportive for sector multiples and we continue to highlight Mitchells & Butlers as a top pick in the sector and would highlight its £3.5bn of freehold property and an attractive valuation multiple of 7.2x EV/EBITDA.”