Jamie Rollo at Morgan Stanley looks at Greene King’s offer for Spirit, and says that integration could drive material synergies of around £50m. He states that the company’s securitized debt structure complicates a separation of its managed and leased divisions, potentially limiting acquirers to the integrated regional brewers
He said: “Spirit has rejected a 100p preliminary all-share offer from Greene King. Spirit has attractive assets, is trading well, the Managed Pub sector is fragmented, and £50m). Our bull case take-out scenario is 130p, so we neutralize our rating to EW.
“Greene King now has until 21 October to either announce a firm intention to make an offer or walk away. Stonegate and Marston’s are mentioned in the press (The Times) as other possible suitors (neither have commented), and there is significant private equity interest in the space. Spirit runs both Managed and Leased pubs, and its securitized debt structure complicates a separation of the two, potentially limiting acquirers to the integrated regional brewers.
“The Managed Pub sector is highly fragmented, and overhead savings and revenue synergies can be significant, we estimate around £50m for Spirit, similar to its PBT. At 90p, the shares trade on a FY15 EV/EBITDA of 8.9x, similar to historical Managed pub transactions (although 45% of its Managed pubs are lower value leaseholds). Our bull case is 130p per share.
“Our base case valuation remains 80p, our bull case (based on a take-out) is 130p, so at 90p the shares are not pricing much of a premium. However, the materiality of cost savings, the sector’s thirst for deals, and the apparent queue of suitors all suggest a risk to being negative on the shares, at least in the short-run. We therefore neutralize our rating and upgrade to Equal-weight.”
