Inside track by Peter Hansen
It has been a good six months for the tenanted pub sector. Enterprise, Young’s, Fuller’s, Greene King and Marston’s have all reported improving like for like performance in their tenanted estates, driven by mild Autumn weather and strong trading in the South of England. Punch and Enterprise continue to make progress in selling the tail of their portfolios.
The government provided a further dose of good news to the pubcos with the announcement that it will not proceed with a statutory code of conduct, whilst still holding the industry accountable for improving treatment of tenants and lessees.
On Friday, RBS announced the sale of the “Galaxy” estate of over 900 tenanted pubs to Heineken. RBS has owned Galaxy since 1999 when it acquired the pubs in a complex sale and manage back from Scottish & Newcastle (now part of Heineken), retaining S&N Pub Company as the operator of the pubs and S&N as the sole supplier of beer. RBS and Heineken have now ended this relationship, with Heineken buying the freeholds from RBS for £422m.
The Galaxy portfolio attracted interest from many parties over the last few years. These include: property investors looking to acquire a high quality estate with secure rents; managed pub companies looking for large pubs capable of being converted from leased to managed; operators of London pubs looking to acquire “gold bricks” –the estate includes some iconic pubs, including the Punch Bowl in Mayfair; and private equity looking for a sustainable core business. Galaxy is the best quality estate to come to the market since 2002.
The Galaxy transaction is an important milestone for the pub sector for several reasons. First, this is the largest tenanted transaction since November 2003. There hasn’t been a large tenanted transaction since May 2007 when Punch sold 869 tenancies to Admiral Taverns, one of the last transactions before the financial market crash of September 2007. Heineken’s acquisition represents a vote of confidence in the pub sector, and underlines the importance of high quality tenanted pubs to Heineken, which it can use to showcase its brands.
Second, RBS has achieved a clean exit, satisfying the objectives of the banks’ non-core division. The banks are under pressure to reduce the size of their balance sheets. The non-core division has achieved a cash exit at a time when there is considerable uncertainty over the future of bank funding given the European sovereign debt crisis.
Third, this establishes a benchmark valuation for private equity firms to consider when investing in the sector. The multiple for the Galaxy transaction is consistent with the 15-year average for tenanted transactions, which is 8x House Ebitda. Of course, the Galaxy estate has larger, more stable pubs than most of the pubs that are currently on the market, and buyers are likely to insist on a lower multiple for smaller, less stable pubs.
We predict that private equity will return to the sector as more stable trading emerges in quality tenanted and leased estates. There are several investors who made considerable money backing tenanted and leased pubs in the 1990’s. As we move forward over the next few years, this could well be seen as the moment when the sector turned the corner.
Peter Hansen is a founder and partner of Sapient Corporate Finance, the leading pub sector acquisitions and mergers advisory firm, which advised RBS on the sale of the Galaxy estate
