City analysts have given a generally positive response to Greene King’s expected £70m acquisition of Capital Pub Company, saying it will enhance the company’s earnings give it a welcome boost in London. Issuing a Buy recommendation for Greene King and a target price of 552p, John Beaumont of Matrix said the deal, assuming it completes in September, should contribute about £6m of ebitda in its current financial year. “Based on consensus estimates for CPUB of ebitda of £7.9m for Y/E March 2012 and then adjusting for the £2m of cost savings and c.£1m of additional profit from the four pubs acquired since its Y/E (which is not in current expectations) then we would expect on a full year basis an incremental ebitda of about £10.9m. “With a undrawn bank debt facilities of around £290m at its last Y/E there is clearly no problem with Greene King paying for the acquisition with debt, which we estimate has a cost of about 6%. On this basis we estimate that the deal should in a full year enhance earnings by about 2.8%.” He added: “Overall (assuming the takeover completes successfully) we believe this deal is both strategically important and financially attractive for Greene King. Greene King remains our preferred pick in the pub sector.” Paul Hickman of Peel Hunt, who also issued a Buy recommendation, said there were “significant benefits” of operating alongside RealPubs, which Greene King bought in April. “Capital has 34 pubs against Realpubs’ 14. Both operate in the premium London market. We believe this is a strong move for Greene King, which is likely to transform the performance of the Capital estate. “The acquisition is expected to be enhancing in first full year. We do not expect this to be material in view of the relatively small scale of the deal (£EV of £93m against Greene King’s EV of £2.5bn). “However, this comes on top of the Cloverleaf and RealPubs acquisitions, each £60m and thus represents a further build-on of good quality physical assets.” Hickman added: “Although at a higher price than Fullers were prepared to pay, we believe this is a strong move for Greene King, which is likely to transform the performance of the Capital estate. It marks the relentless progress of Greene King, still not recognised by the market.” Nigel Parsons of Evolution said: “With the acquisition of attractive and well located assets, the deal is expected to be earnings enhancing in year one and we retain our Add recommendation. “With expected c£2m of first year synergies (50/50 cost/revenue split), the deal is expected to be earnings enhancing, with full-year, post-synergies ebitda expected to be >£12m on our estimates (implying a prospective EV/ebitda entry multiple of <8x). “Given the likelihood of completion of an earnings enhancing acquisition that would bring more quality assets into the estate, we retain a bullish stance on the stock (trading at 10.0x FY11E P/E, dividend yield 4.8%). We have an Add stance and unchanged 560p target price.” However, a note from Credit Suisse expressed a preference for Marston’s approach of building up its newbuild estate. “Whilst we acknowledge Greene King is making some sensible deals within the sector, we have a preference for Marston’s, which is achieving an effective 5.4x ebitda multiple on its newbuild strategy - we deem this to be more visible and less riskier than pursuing an acquisition led strategy. “Furthermore, we note Marston’s offers more self help within its tenanted pub estate through the new retail agreements, which will be rolled out in 40% of its estate by FY13. “Overall, we estimate 17% upside to our current Marston’s FY15 EPS estimates if the current pace of outperformance in its managed newbuild strategy and tenanted retail conversions continues – a similar best case scenario analysis for Greene King gives c5% upside. “Greene King currently trades on a FY12 calendarised P/E multiple of 8.9x, which is a 11% premium to Marston’s on 8.0x.” The note added: “Overall we think this is a sensible deal, which boosts the company’s presence in London, and complements the recent acquisition of Realpubs (14 premium London based pubs acquired in April 2011 for 8.4x ebitda). The deal will give rise to at least £2m of synergies within year 1 (£1m from central overheads, with the balance from purchasing synergies, revenue synergies and integration with recent deals). “We thus estimate the deal to be 2% earnings accretive in FY13, assuming £2.5m of synergies. We expect the deal to take Greene King’s headroom to its £400m bank facility to c£220m as at April-2012.”