Should the Business, Innovation and Skills (BIS) Pubco tenanted review lead to a mandatory free-of-tie decision, it could be devastating for the tenanted pubco model in its current form and lead to a decrease in pre-tax profit across the leading operators, according Dryburgh Research.
Analyst Nigel Parson of Dryburgh said that it was the Government’s stated intent to shift up to £234m of profit from landlords to tenants, and that the midpoint was equivalent to £4,250 per tied tenanted pub, with a range of zero to £9,750.
He said: “The worst case scenario is equivalent to a reduction in PBT of 65% for Punch, 41% for Enterprise Inns, 18% for Marston’s, 9% for Spirit and 8% for Greene King. Do not expect the pubcos to run hybrid models. Rather, we would expect them to go completely free-of-tie, trigger rent review clauses, remove all SCORFA benefits, sell hundreds of smaller pubs and convert to REITs.
Parson said that mandatory free-of-to option would not necessarily be Armageddon for the pubcos with tenanted operations but they would have to reshape their business models drastically to survive.
He said: “We are reducing our ratings for Enterprise Inns and Marston’s to Neutral from Buy; Enterprise has the most change to contemplate, but Marston’s enjoys a higher rating and so has potentially further to fall. We retain a Neutral rating on Punch, and lukewarm Add recommendations for Greene King and Spirit.”
Parson said he sees several key issues the Government must sidestep if it gets involved: (1) the free-of-tie trap and (2) the creation of a two-tier pub tenanted industry, plus the broader negative potential implications for the (3) franchise and (4) property industries.
He said that going down the manadatory free-of-tie route would undoubtedly “trigger a furious legal response” from the affected companies, with investment in their stocks becoming ‘dead money’ until the uncertainty was resolved.
He said: “For the next three months, investors in the pubcos with significant tenanted exposure are exposed to ‘fat tail’ risk. The mandatory free-of-tie option and redistribution of profits from pubcos to tenants is unlikely – but devastating to the tied tenanted business model if it happens. Pubcos can adapt to survive but the surgery could be extensive. The key point for investors? If your portfolio cannot absorb the hit of a bad outcome, don’t take the risk.”
