Assessing the next counter Punch

A big week for Punch, then. The pub group bought into Matthew Clark, sold a swathe of pubs to Admiral Taverns and entered the FTSE 100, Britain’s index of leading public companies. The group is now one of four that broadly represents the UK drinking and eating-out market in the Footsie, alongside Enterprise Inns, Whitbread and Mitchells & Butlers, which was also promoted to the club last Friday. The Matthew Clark deal is fascinating, one that will give Punch’s licensees access to a greater selection of wine and spirits brands – two drinks categories that are actually doing quite well in the on-trade – and will drive down its purchasing costs. If Punch, which has taken a stake in a JV that owns the wholesaler, can arrange the same buying terms that it enjoys from the big brewers, the impact on Matthew Clarke’s profits could be dramatic. If it can shave a further £20 per barrel from the 250,000 that Matthew Clark purchases each year, it would add something like 50% to the distributor’s profits. There was something of a dichotomy between the relative size of the Matthew Clark and Admiral deals, and the interest they attracted. The Admiral disposal was worth almost 10 times more than the £35m Punch invested in the wholesale group. In selling 870 pubs, Punch has disposed of just 5% of its tenanted / leased profits, and 3.5% of the overall group’s earnings. It will significantly raise the profitability batting average within the leased business, which is being further enhanced by the transfer of managed houses from Spirit. With 2,700 pubs, the deal also makes Admiral the third largest operator of tenanted and leased pubs, not bad from a standing start four years ago. Executives within Punch were keen to emphasise that the disposal was not prompted by a desire to weed out lower-end pubs ahead of the upcoming smoking ban in England, but that is hard to believe. It is a good move and one that reduces its exposure to management-intensive houses that could be vulnerable in what will be a testing trading period. Punch is becoming an increasingly curious business – who would of thought not so long ago that it would operate managed houses and own part of a wholesaler? And how much further back up the vertical chain will Punch go? Is a brewery next? There is a long-held view that CEO Giles Thorley would love to add one of the large regional brewers to the business he has helped form, namely either Greene King and Marston’s, although it’s more about buying attractive pubs than breweries. Indeed, there was recent speculation – and a very fast-moving Marston’s share price – that suggested it was a Punch target. Talk of such a deal has faded. The two groups’ pub estates in the Midlands overlap to such an extent that the amount of onward-selling that would be required to get the deal past the competition authorities would probably prove prohibitive. I suspect the deal that Thorley most covets is Greene King. Just as the Marston’s deal would cause a headache, an acquisition of the Suffolk-based group would create a neat fit, given Greene King’s density of pubs in East Anglia, a region where Punch is relatively thin on the ground. It is also worth considering that in commercial director Jonathan Paveley, Punch has a key executive who knows Greene King intimately. As Greene King’s strategy director, Paveley sat on the board for many years, leading the group’s own acquisition agenda. Thorley was quick to play down such a transaction last week, saying: “Never say never, but that’s not on our shopping list.” But his comments will not dampen speculation. Now that Thorley is staying at Punch, many will try to second-guess his next move. These deals are all about timing and personality, and Rooney Anand, Greene King’s CEO, clearly has big ambitions of his own. In fact, there was talk last week of Anand himself finally setting Greene King’s sights on Marston’s. It’s a deal often talked about and one that holds compelling logic, but one that has always seemed a little fanciful. But that may change, especially as the number of regional targets available for purchase dries up. When there is a need, and a will, they will talk. A collaboration would offer a comforting white-knight solution against selling to an acquirer not necessarily interested in beer brands and brewing. Separately, there was an interesting suggestion last week from analyst Simon French at Numis who proffered a logical tie up between Mitchells & Butlers and Whitbread, as both companies operate assets that the other one is more adept at running. As we head in to the key reporting period of May, we will hopefully get a clearer understanding of the strategic paths these pub businesses plan to take. What is certain is that there are many more deals to come. While Enterprise appears to have excluded itself from further consolidation, Greene King, Marston’s, M&B, Punch and Whitbread will not remain in their current forms for too long.