The tenanted pub sector is facing a tipping point in 2013, with new optimism generated by fresh investment tempered by the threat of new regulatory interference through the proposed statutory code.
There’s renewed hope that the sector will end the year on a more secure financial footing and be more operationally efficient after years of lagging behind its managed counterparts. News of Admiral Taverns’ c£200m takeover by US-based Cerberus Capital Management, a leading international private equity firm, earlier this month was followed by a series of announcements of new funding arrangements for tenanted operators.
Hartlepool-based Camerons, which operates 69 sites, completed a £24.7m refinancing deal with the Royal Bank of Scotland Corporate & Institutional Banking (RBS CIB), with chairman David Soley saying that the firm “continues to seek further opportunities to grow our presence in prime north east markets”.
Hydes, the Manchester brewer and pub operator, has agreed a new £9.5m refinancing deal and secured more favourable terms as part of a financial restructure that saw the company exit its ‘cap and collar’ hedging arrangement.
JW Lees, Joule’s and Arkell’s, which all operate tenanted estates, have also recently announced new funding.
In its Business Outlook report, director and head of pubs Neil Morgan said: “As pub companies continue to widen their appeal, improve their trading performance and boost investor confidence, we expect the transactional market to become a little more dynamic in 2013. Whilst the majority of deals we witnessed during 2012 were individual and small portfolio sales, we can expect to see some bigger transactions in 2013 as confidence grows.”
However, he played down expectations of more major deals in the tenanted sector along the lines of the Admiral/Cerberus transaction. “We thought last year that the RBS/Galaxy sale to Heineken was going to be the start of more deals to happen in the tenanted sector, and it didn’t actually happen. I suspect that might be the same story here this year.”
It comes as operators continue to report improving trends among their tenanted and leased estates, helped by innovation, particularly the move to franchise and franchise-style agreements.
Most recently, Spirit Pub Company chief executive Mike Tye told M&C Report this week that it would undertake another trial of converting leased sites to its managed concepts and operated under franchise, after reporting “encouraging” results at its first eight conversions.
One analyst told M&C Report: “We are seeing the estates getting into like-for-like profit growth and that’s a healthy sight. Indicators of licensee distress from companies like Greene King are at an all-time low - better than pre-recession levels.
“We are seeing a lot of operational improvements finally coming to the tenanted market. They are finally adapting managed pub disciplines that are over due. Greene King and Marston’s are at the forefront of that by moving pubs to franchise agreements. The pubcos are starting to move down that route as well.
“The tenanted pub has to compete with the managed pub and can’t afford to be inefficient - the old tenanted model is fairly inefficient.”
Geof Collyer, analyst at Deutsche Bank, said the fact most pubcos have sold the majority of their “tail dragging” pubs means they have had more time to focus on developing trade at its other sites.
He said licensees are “better prepared and have better controls than they have ever had”. “The pubcos should all have a much better understanding of what’s happening in their pubs than they ever have.”
A big question remains Punch Taverns’ ability to resolve its dispute with bondholders and complete the restructure of its securitisations this year. In October Punch said that following a review of its capital structure, the firm said both its A and B securitisations are over-levered and unsustainable in the current form.
One source told M&C Report he was hopeful of a resolution this year. “Every party wants it to happen. The bond holders want the management to run the pubs, not themselves.”
However, Collyer said: “I’m not sure anyone is qualified to work out if anything will get resolved this year. I think it’s too early to tell.”
The industry was caught by surprise earlier this month when Business Secretary Vince Cable announced plans implement the code governing the pubco/tenant relationship on a statutory basis, overseen by a code adjudicator with powers to impose sanctions including fines on pubcos for breaches. It would apply to companies that operate more than 500 tied tenancies and leaseholds.
British Beer & Pub Association chairman Jonathan Neame said he was “disappointed” with the news, arguing that the self regulation agreement from November 2011 “has not been given a proper chance to work”.
However, a number of commentators have played down the negative impact of the move. Collyer said: “The industry – or all those fully complying with the voluntary industry code - would probably welcome a statutory code as it should finally put to bed once and for all the process of continual investigation that it had hoped had been ended back in November 2011.”
In addition, there was little movement in share prices of tenanted operators following the Government’s announcement.
A consultation on the proposal is due in the spring and Morgan said he believed it would take at least three years to be enacted.
“By that time we would have had another election and it’s not high up on anybody’s agenda. So long term I don’t think it’s going to have a massive impact.”
He added: “The question is whether the pub companies will look to the franchise model to a larger extent to offset the limit on the tied model.”
Spirit’s Tye said: “The devil is in the detail - or the angel is in the detail.”
