The return of the deal market?

The disposal of some the finest assets in the Punch Taverns estate, which can only be described as a fire sale, has thrown up some interesting questions. Firstly, in today’s world, does this deal indicate that the £6.5bn value of the Punch estate is slightly inflated and that writedowns must ensue? The deal to sell six of the very highest quality London pubs within the Spirit business to Fuller’s was struck at £21.1m – an 18% discount to their book value of £25.6m, prompting some to suggest that the value of Punch’s 8,400 pubs needs reappraising. Whilst it is impossible to imagine that Punch’s estate is worth as much today as it was yesterday, analysts have been quick to urge caution. The motivation for the sale is key and this is about buying up long-term debt. As Brumby & Co have pointed out, when you buy your debt back for 50p in the pound, you can afford to take a hit on book value. One analyst, who asked not to be named, said the truth was somewhere in the middle. He said: “The estate might have to be written down – but possibly not as much as is implied by this deal – it is not a true reflection. “This is all governed by what Punch can buy its bonds back at and when they are trading at such a discount, selling pubs at this level to book value is not a disaster. This is all motivated by the cheapness of the bonds.” The £21.1m sale will finance the repurchase of up to £40m of those bonds. The second question is, is this the start of the return of the deal market? Some suggest the ebb and flow of buying and selling pubs will, when it comes back, recommence at the very top end of the market, before it spreads to the middle or bottom of the market. But perhaps, for a seller prepared to accept this price and for a buyer with access to finance – two rare breeds – the top end of the market never went away? There are more reasons that not to think that this transaction is not indicative of any wider trend, chiefly because this is a unique situation and the assets are once-in-a-lifetime pubs (once-in-a-lifetime pubs that just happen to have been sold several times in the past few years). Now they are part of Fuller’s we will probably never ever see them again on the market. What seems certain is that one or two more deals like this – between Punch and a regional – will follow. The industry rumour mill suggests that Shepherd Neame is in the frame to exchange on a similar package within the next week or so. There is a fair sense of irony that, after years buying up all sorts of estates and companies – some a bit like Fuller’s and Neame – Punch is now having to offload the very best of the business that it has built. The deal also speaks against a model of continually adding quality at the top and selling on pubs at the bottom, albeit that the Punch model was a pure leased model until the addition of Spirit just over three years ago. After accepting that the market for bottom-end pubs is just not there, Punch, in its fairly urgent quest for cash, has done the unpalatable and sold its best. Everyone has sites on the market – the casual dining restaurant groups, the managed pub operators, the leased pub groups – but everyone is desperately trying to offload their dogs. I suppose selling the cream of the crop is easier to stomach when the business is of the size and scale of Punch. As for Fuller’s – and other evolving regional players – the pub market has come back to them. A few years ago, as pub prices moved out to nine then 10 times underlying profits (and more), many thought that their refusal to pay such lofty multiples was just another example of a failure to adapt to a brave new world. The market was simply leaving them behind. While undoubtedly they would have grown a bit quicker if they had approached every pub deal with a ceiling price of 8.6 times, it now looks as though they were increasingly justified in steering largely clear of the more recent largess. Of course the caveat is that one pub deal does not a market make.