Demerger announcement Q: Well, firstly, what course of action are you undertaking following your strategic review? In essence, what are you announcing today? A: The first thing to say is just to put it in context and we're very, very pleased with the operating performance of the business over the last six to nine months or so, and I think that's very, very important. Both managed and leased have really moved ahead and that sets a good scene in the context of the strategic review. But as we look at both of the businesses I think it's clear that they face different challenges, they have different prospects looking forward and, therefore, we need to adopt different solutions. Managed, we believe, there's an immediate value upside from growth, from development, from continuing the investment in the business and we want to get after that. In leased we think the situations are bit different. We think we need to downsize from the current estate size to something like 3,000 really high quality pubs which will then be able to grow into the future, so different solutions required for both sides of the business. When we look at the current group structure what we don't think we can do is we don't think we can maximize those opportunities with them both existing within the same group and, therefore, what we're proposing is that we separate the managed and the leased businesses. How we do that is by a demerger of the Spirit side of the business from the Punch side of the business. Q: Considering the array of options that you had to consider, why did you go down the demerger route? Why is that in the best interests of all your stakeholders? A: I think there are five key reasons. They are different businesses. They have different prospects. They need real focus to enable the management teams of those two businesses to really drive them forward in the different ways that's required. That's the first thing. The second thing is if you look at synergies between the two businesses, why do they co-exist in the same group? We think they are limited so we don't think there's significant cost associated with separating them. And, indeed, if you think ahead, what we think we need to do in leased over time potentially could have some negative impacts on the managed business. That's the second thing. The third is we believe it gives real transparency and clarity for those businesses and at the moment we don't think the markets - and that's the equity markets or the bond markets - really value either business properly. This will give transparency in that regard. We think it provides real choice and liquidity for our investors and we think that's important. The final thing, and I think, again, equally important, is the fact that it gives real clarity, accountability to management and employees, enables us to design incentive schemes that are really focused on the two sides of the businesses. So for all those reasons we think a demerger is absolutely the right way forward. Q: Why haven't you spoken to the bondholders about renegotiating the Punch A&B securitizations? A: Well, the focus of the last three to four months has really been about looking at the overall group structure, the strategy, the long-term prospects of both of the businesses, how are they performing and trying to come up with a solution, if you like, an overall group structure to take the businesses forward. That's what we think we've done today and the demerger is the solution that we've chosen. We think it's the right way ahead so there's been no need to engage with bondholders at this stage. Q: But what other options did you consider and did you consider walking away from the bondholders? A: Well, I think there's been much said about a walk-away. And I was very clear when I kicked off this review that nothing was off the table and I'd look at all angles and, yes, we have considered other options. We think demerger is the best way ahead, but we did consider a walk-away. We think it's absolutely not in the best interests of any of our stakeholders. We think it takes away that long-term value that is inherent within the Leased business. We think if we walk away and that results in an administration by default, that that would have a significant impact on the business. It would be a difficult, messy process. We think that would affect the valuation of Spirit as well. So we didn't think walk-away was at all an appropriate option for our shareholders nor for our other stakeholders. Proposed capital structure Q: How are you going to allocate the PLC cash between the two businesses, and how much to each one and on what basis? A: Well, this is something that's still work in progress and, clearly, we can't finalise that until we complete the demerger. But the basis on which we're looking at it is that we need to leave sufficient working capital for both businesses to enable them to execute their plans as they go forward. As we look at that, roughly what we're looking at, at the moment, is this cash will be split broadly evenly between the two businesses; that's after we account for one-off costs for the demerger, which we think is about £30m. The new entities: Punch and Spirit Q: Managed looks fine, but Punch looks to have more challenges. Is there an independent future for both these businesses? A: Absolutely, and that's why we're recommending today that we de-merge the two businesses. We really think they've both got terrific prospects in the long term. If you start with Managed, that's about growth, development, expansion. The work we've done and the money that we've spent in developing the Chef and Brewer brand, rolling out Fayre & Square, Flaming Grill etc, expanding that estate by converting some of the leased properties within the Spirit debenture, keeping ongoing in terms of that operational upside, terrific prospects, we think, to grow shareholder value over time. Leased, equally, a slightly different situation and we know we have to restructure the estate, reposition ourselves, get down to that core of 3,000 really high quality pubs. When we get there we'll be the best operator and highest-quality, most trusted operator in the UK. Now, there is a process that we need to go through to get there and maximize value on the way through with disposals of the non-core estate, but both businesses we fundamentally believe have a long-term future. And that's why we're separating today; to give them the background, to give them the foundations to enable them to exploit that future. Q: And within the Spirit entity you're considering more conversions back to the managed business. A: Well, conversions are a big part of expanding the business. So we have about 550 Leased pubs within Spirit. We've done some initial analysis. We think we can convert about 100 to 150 of those to one of our managed brands, so we think that's an exciting part of the opportunity to take Spirit forward. There are other things. The operational turnaround is continuing. We still think we're well behind some of our peers in terms of average weekly sales per pub. Our margins, we think there's a lot to go for there. So if you take that and you add to it investment in the estate, to continue to rollout the brands and the expansion that can come from converting some of the Spirit leased pubs, we think the future for Spirit is very, very bright. Q: Who will run these two businesses and what, if anything, can you say about the role and search for a new chairman? A: We've been clear today that that's one of the things we still need to finalise over the coming months. I think an important point to make is that we've got a really strong management team in Punch, all of whom are committed to the future of the business. We really want to see this demerger through and continue with the businesses after they've split. So what we expect to have is a good combination of continuity in terms of the existing management team and, clearly, we need to supplement that with some external talent, in particular in the non-executive arena, and that's something that will happen over the coming months. Q: And if and when the demerger is complete, then presumably both these businesses are in play? A: What we're doing here is we're setting both of these businesses up to be able to focus on the opportunities and some of the challenges that they have. So we're providing a great platform on the managed side to enable to realise that immediate value through growth and development, on the leased side to enable it to downsize to a real sustainable core from which we can grow in the future. That's the objective of this. The concept of being in play or not is irrelevant. We are setting these businesses up to have long-term, sustainable growth for our shareholders. Q: So what are the next steps? A: There are a number of things that we need to do. We've talked about management already. We need to finalise the cash allocation. We need to start the process, which we've already begun, of separating the businesses internally. Clearly, there are some complexities in terms of internal restructuring that we need to get through, such that these businesses can be set free at the point of demerger. All that will happen over the summer period and we would expect to complete the demerger by the end of summer.

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