Inside Track by Mark Stretton
Is the pub industry going “asset lite”? That was the question this weekend as the sector pondered a pub sell-off by Mitchells & Butlers and a possible move to a Reit – Real Estate Investment Trust – structure by Enterprise Inns. There is a sense that the separation of operations and ownership, a process that has arguably been underway for some time, is gathering pace, driven on by Reits – the government’s new tax efficient property vehicle. Speaking at M&C Report’s annual seminar for senior people in the pub and bar industry last week, one of its leading M&A practitioners proffered a provocative scenario for the industry structure of tomorrow. Jim Fallon of McQueen suggested that operating companies of the future may be “asset lite”, if not asset free. Fallon said it was possible to envisage an industry structure that would see entirely leasehold operating companies (like M&B) and one or two dominant Reit vehicles (Enterprise) owning assets. Fallon argued that operators would divest themselves of their pubs given the value arbitrage between what they are worth to a pub group and a property group. M&B, which owns brands such as All Bar One, Harvester and Toby, released a statement yesterday confirming that it was undertaking a property review. It said: “Further to press speculation, Mitchells & Butlers confirms that, following a comprehensive review of options for its freehold properties, it is exploring the possibility of a 50/50 joint venture on the majority of its property assets. “A number of third parties have been approached, and negotiations are proceeding with R20, the investment vehicle of Robert Tchenguiz, although there can be no certainty that any transaction will be forthcoming.” M&B has ruled out a Reit and is, from the sounds of it, pursuing a similar deal to the one struck by Tesco earlier this year that saw it form a property joint venture with British Land. The deal allowed Tesco to crystalise value from its property portfolio, while retaining some control, and an option to buy back the properties at a later stage. M&B is expected to outline the plan in more detail at tomorrow’s interim results announcement but it is clear that pressure placed upon the group to do something has been significant. It is symptom of the fact that at the moment pure property vehicles are worth more than operating companies that own property. If this situation proves sustainable, more such deals will follow. Meanwhile Enterprise is consulting with its advisers regarding the potential of converting itself to a Reit. The leased giant believes there are grounds to think it may be able to convert to a Reit in its entirety, if it can persuade HMRC that profits from beer that it sells to licensees are part of the rent equation (Reit structures must derive 75% of revenues from rent). If successful the move, suggests Deutsche Bank, would change the basis for the group’s valuation significantly, and would lead most other companies with comparable leased estates to attempt a conversion to a standalone Reit. There may be first mover advantage here. If the “Enterprise Reit Group” becomes a reality it would, given the tax advantage and valuation upside, be in a strong position to buy up other pub estates. Arguably, the separation of pub operations from ownership has been underway for some time, with sale-and-leasebacks and the march of the dominant leased groups like Enterprise Inns – sophisticated property companies that have bought up swathes of managed houses to convert to lease. There is a uniqueness and a rarity value in UK licensed property, but as the latest moves from M&B and Enterprise Inns show, the bond between operational improvement and freehold values may not be enough to prevent pub operators shifting to an asset-lite future.