Around 2,300 Punch licensees will be told by Punch Taverns this month that the company is open to offers from them for their freeholds. The pubs are all in Punch’s turnaround division, where the company does not believe they can generate enough income for themselves and licensees in the long-term. Punch has already told City analysts it wants to sell the 2,300 pubs at the rate of 500 a year. But the rate of sale could increase if licensees take up the offer to acquire their freeholds in large numbers. Punch will also look at other routes to selling the pubs, selling the pubs in blocks to investors and appointing property agents to sell them. But it looks like licensees are likely to have a window of three or four months where they will be able to table offers before other sales routes are explored. Punch will not be providing licensees with an asking price, meaning licensees will have to use their knowledge of their own businesses, including barrelage, to work out a sensible offer for their freehold. In other Punch leased disposals, licensees have bought around 10% of available pubs. The percentage of licensees buying their pubs in this tranche is expected to be higher, not least because the pubs are higher quality and therefore not expected to be acquired for alternative use to the same extent. Boss of Punch’s leased division Roger Whiteside said: “These 2,300 pubs in our turnaround won’t sustain enough profit for us and our partner over the long-term. “We’ve already received letters from licensees saying ‘We’re interested (in buying)’.” Punch and its managed division Spirit are to de-merge at the end of the summer to become two separate listed companies. But Punch and Spirit will start to operate as two separate companies in day-to-day terms from 4 July – dubbed “Independence Day” internally. Punch leased will focus on just under 3,000 highest quality leased pubs, where there are only 169 vacancies at the moment. Whiteside added: “This the final part of our turnaround plan. We’re taken a more prudent look at the outlook for wet-led pubs (and placed 2,300 pubs in the “for sale” turnaround division). “Those pubs in our core division undoubtedly have a future, with two to three per cent ebitda growth per year. “The core estate is the best quality estate in the UK and we will focus investment on these properties and drive their performance.” Punch leased is completing an internal re-organisation – the pubs-to-Business Relationship Manager (BRM) ratio in the core division is 45, while it is 65 pubs per BRM in turnaround. Inside Track special by M&C Report group editor Paul Charity The doors are opening at the big Punch pubs jumble sale. First into the village hall to nose around for bargains will be several thousand Punch sitting tenants. Not surprisingly, Punch will not be giving tenants a guide asking price for their pub - it doesn’t want to deter “ambitious” offers that might come in. But tenants should not have too many problems working out a sensible offer given their first-hand knowledge of barrelage and performance. And Punch has provided City analysts with guidance on the value of these pubs as a group. They have an average book value of £280,000 and produce average annual earnings for Punch of around £42,000, a figure still in decline by 18% year-on-year. A sitting tenant interested in buying their pub should add the rent and the wet rent together (composite brewer barrels multiplied by £220 minus discount) and multiply it seven times (the current prevailing multiple in the pub sector) to work out what their pub is currently worth to their landlord. Punch has indicated that it wants to sell 500 pubs a year from this group. But this is a conservative target aimed at managing City expectations down and would happily sell much, much faster than this. There will be plenty of pubs among this group that have untapped potential given a motivated, keen-to-invest freehold owner. This group of pubs is, by definition, better quality than the thousands of leased pubs that Punch has already sold. The obvious and rather high hurdle for tenants remains the need to raise a lot of equity to obtain the necessary bank lending. The ratio stands at around 40% so on a pub worth £280,000, a licensee will probably need to raise upwards of £112,000 to secure a bank’s backing. But this fact-of-life is part and parcel of the opportunity here. The banks are still licking their wounds from rather reckless lending during the boom years. Some of that lending was to companies like Admiral Taverns, which bought thousands of the lower quality pubs that the quoted pubcos didn’t want. Banks have lost all appetite for lending to bulk-buyers, having had to take massive writedowns. The same caution now applies to all buyers, which restricts the number of buyers and therefore the prices that pubs change hands for. I wouldn’t be surprised if the number of sitting tenants buying their freeholds in this latest group pushes towards 20% or 400 to 500 pubs out of the total. At some point soon, the next group of obvious buyers - cash-rich smaller investors, multiple pub operators, property groups, regional brewers and alternative use buyers will get a chance to wander past Punch’s jumble sale table. The historical perspective here, the rise and fall of pub property prices, is a fascinating sub-story. Punch was an over-keen, over-optimistic buyer of tenanted pubs, fortunate, as it turned out, to have secondary buyers happy to mitigate some of the potential writedowns by taking many of these pubs off their hands. It’s hard to imagine the market that prevailed for much of the past decade ever returning - but then again boom and bust is a cycle the UK economy seems incapable of escaping.