Mitchells & Butlers (M&B), Greene King and Starwood Capital, are amongst six firms believed to be set to bid for all or part of Orchid Pub Company, which was placed on the market last year with a price tag of c£250m.
According to The Sunday Times, M&B and Greene King will be joined by Spirit in bidding for the group’s food-led outlets, which are believed to make up c.170 of the company’s c225 sites.
At the same time, Starwood Capital, Colony Capital and a third unnamed private equity group, which is believed to have a track record in the leisure sector, will bid for the whole of the Rufus Hall-led company, with offers for the business due tomorrow.
Backer Deutsche Bank and Orchid’s management team would prefer an outright sale placing the private equity group’s in pole position for the business, which is being advised on its options by Sapient Finance.
Deutsche Bank took control of Orchid in 2012 after a financial restructuring of the group, which was formed in 2006 as a breakaway from Punch Taverns and initially backed by US investment fund GI Partners.
The company, which is believed to be generating ROI of 40% on its capex programme, is thought to have also considered exploring an IPO after holding meetings with a number of investment banks earlier this year.
Comment by M&C Report editor Mark Wingett
It looks like the endgame for Orchid will be played out over the coming few months and while the sale of the whole of the business looks the most likely outcome, the presence of M&B, Greene King and Spirit amongst the bidders, throws up an interesting thought: Is the tenanted sector after years of playing second fiddle to the managed sector in terms of M&A activity about to return to centre stage over the coming 18-24 months.
As a new tenanted sector player enters the fray in the shape of Hawthorn Leisure, does the interest of the three mentioned pub groups in part of Orchid, suggest that they believe this could be last time in a while that a significant managed estate will come on the market?
Greene King for one has stated on many occasions that its focus is on growing its managed estate while reducing its exposure to the tenanted sector, hence the sale of 275 pubs to Hawthorne. Aside from new builds and individual acquisitions, where is this growth going to come from? The next largest portfolio to come on the market should be the 69-strong TCG, now on the books of US fund Lonestar, after that it is InnBrighton, which is already in talks with Luke Johnson’s Risk Capital Partners regarding new investment.
The mantra from operators and property advisers over the last few years has been the demand for managed sites, but after the two cases named above where are the leading players set to look. Where are the Capital Pub Company and Realpubs of 2014? Cirrus Inns stands at 12 sites with a goal of reaching 30 high-quality country pubs over the next few years; Faucet Inn has a number of sites on the market and is currently seeking new funding; while City Pub Co is probably 12-18 months away from assessing its options.
Under that its high quality operators such as Oakman Inns and Whiting & Hammond, but these are more likely to be private equity plays at this stage of their development.
You can now see why Greene King is starting again to look at other sectors to fulfil its growth plans. As it said earlier this month, its recent findings on its next stage of growth point to “the development of ‘all day’ concepts and/or acquisitions and that areas under investigation included casual dining, fast casual and coffee/pub café”. With a dearth of opportunities in its traditional marketplace, you can see why a business like Loungers would undoubtedly come onto its radar, and that of M&B, in due course.
As my colleague Rob Willock wrote in the Publican’s Morning Advertiser last week, tenanted and leased pubs have not been considered the sexy side of the market for some time, and the ‘bottom ends’ of the big pubcos’ estates have been among the most unloved and underinvested properties in the sector.
But one man’s trash is another man’s treasure, as they say. Many have tried over the last few years to secure investment and unlock the potential in reviving swathes of unloved pubs sitting at the bottom end of the pubco’s estates. Red Oak Taverns, the vehicle set up by Mark Grunnell and Aaron Brown, former associates of Robert Tchenguiz, back in 2011, were seen by many as one such group, but it has continued to trim and invest in the 32 pubs it initially acquired.
Hawthorn is believed to be weeks away from completing its second acquisition in the sector, with talks ongoing regarding c70 sites from Tchenguiz’s former R&L Properties vehicle, while a further deal is also believed to be in motion. Talk that it is looking to eventually grow to an estate of up to 1,000 sites may be premature, but it has made a strong first impression.
Now it will be interesting to see who will follow. There is scope to create and grow tenanted portfolios by acquiring further disposals from the bigger companies and banks left with failing businesses on their books, who remain sellers of non-core assets in search of keen buyers.
As one area of pub M&A activity looks set to become a trickle, another may have just seen the dam broken.
