Emerging from the emergency room

“Businesses that a year ago had been able to paper over the cracks are now being fully exposed,” is how Nick Wood, a recovery and reorganisation partner at Grant Thorton puts it. Wood is becoming a busy man – and the fear is he can only get busier. “Unfortunately this feels like just the beginning,” he adds. According to figures published this weekend the number of businesses going bust in England and Wales rose by 15% to a five-year high in the three months to June as the economic downturn began to bite. A total of 3,560 enterprises were liquidated. The number of administrations in the first six months to June was 42% higher than last year. In the three months to June, the number involving larger companies spiked 60%, from 585 to 938. Pointedly, the prevalence of bars and clubs companies within these figures – along with property companies – is high. “A sharp drop in discretionary spending is having a direct impact on insolvency figures with leisure companies featuring highly, as well as property developers,” says Geoff Carton-Kelly, head of restructuring and recovery at Baker Tilley. In the eating and drinking out market, a clutch of small companies including Bar Sport, Beanscene, Future 3000 and 7T Limited have been forced into administration in the past week or so. Herald Inns & Bars was the latest to emerge from a pre-packaged administration (as Cougar Leisure), after agreeing with its largest creditor Halifax Bank of Scotland (HBoS) to hand back to landlords the keys to almost half of its 37 bars. Food & Drink Group is expected to be sold within days via a pre-packaged administration while the banks that are effectively now controlling Regent Inns are thought to have appointed recovery specialists. And the future of another of the sector’s historic brewers hangs in the balance this morning after HBoS refused to support a proposal put forward by the management of Cains concerning its £40m debt burden. Clearly it is an awful time for those individuals involved at these companies, some of which will survive, and re-emerge from the ‘emergency room’, and some will not. But the plight of Cains possibly points to why the current shakeout of over-leveraged bar groups – and the retiring of poor or chronically over-rented sites – is necessary through the administration process. Before Cains reversed into Honeycombe Leisure in May 2007 – a deal that saw its pub estate jump from 10 pubs to about 110 – the company made modest underlying profits of almost £400,000 from sales of £24m. Then last October it announced losses of £2.8m, some of this stemming from transactional costs, but then in the six months to the end of April 2008 it unveiled losses of £4.6m. It said that the period had proved to be the most difficult in its history – which is saying something given this business almost closed down twice in the past – and the figures “may cast significant doubt on the group’s ability to continue as a going concern”. While sales of Cains beer are ahead 18%, it seems that the purchase of Honeycombe – a deeply troubled company before the Liverpool brewer came in – has been a step too far. The estate does comprise some good assets but it also has many underinvested, leasehold (and loss-making) sites. These sites appear to have eaten Cains’ cash. It is almost as if by stepping in, and not allowing Honeycombe to go through the administration process just over a year ago, Cains has prolonged the agony of some of these sites, and that is why this current shake out is necessary. In the current market, some pub assets cannot be turned around. It is why many would-be buyers of struggling companies out there are not buying but waiting. It must be hoped that Cains can do a deal and that the situation is not as bleak as it would appear. But the rationalisation of the industry is necessary and part of the renewal process. For those that are left – the strongest operators with the best assets – there will be many opportunities.