Inside Track by John Harrington
I make no apology for returning to a key topic, some would say the key topic, for the eating and drinking out sector at this time: funding. The past couple of weeks has seen a resurgence in investments in the sector from, encouragingly, a variety of sources.
Private equity reaffirmed its interest this month with Piper’s £16m investment in the highly-regarded cafe bar group Loungers, while banks are showing signs of renewed confidence in the eating-out side of the industry at least. This can be seen by Brasserie Bar Co securing a £6m facility from Barclays, and Barburrito receiving a £3.25m investment via the Business Growth Fund, an independent company backed by five major banks that invests in small and medium firms.
When taken alongside measures such as the tax-efficient Enterprise Investment Schemes, favoured by industry veterans such as Capital Pub Company founders David Bruce and Clive Watson, and Gavin Drew and Ian Grundy of Foundation Inns, it’s clear that there’s never been as many options for investment-hungry operators.
But another source of capital is emerging as an option for retailers keen on expansion, one with a pedigree dating back many years: the brewery loan. In the past, these would typically see pubs under contract to buy drinks directly from the brewer (a ‘tie’, if you like). They were seen as a win-win for pub operators and brewer alike, providing the former with a long-term, low interest source of finance and the latter with a guaranteed route to market.
The rise of the big tenanted pub companies in the 1990s saw the use of brewery loans wane as supply ties were negotiated at pubco level. But times have changed, and major brewers are waking up to the need to grab a route to market from the plethora of fast-expanding and often free-of-tie multiple operators that have been snapping up disposals from the major national pubcos.
Perhaps one spur was Heineken’s acquisition last December of 918 pubs from RBS, operated under the brewer’s leased pub division Scottish & Newcastle Pub Company, for £422m. A key benefit from Heineken’s point of view was a cast iron guarantee of a substantial route to market in the on-trade. It’s likely that other major brewers are looking at how they can secure similar supply contracts.
One such company is Tennent Caledonian, the Scottish firm owned by Magners producer C&C Group and brewer of the Tennents brand. Last year it lent £6m to pubs and small pub companies. This year it’s rumoured to be offering more than £10m, and has appointed corporate finance expert Kenny Barclay of PricewaterhouseCoopers to increase the investment programme. The move is largely seen as a way to take back market share from the likes of the Greene King-owned Belhaven Brewery.
Earlier this month Tennent Caledonian said it would be lending an undisclosed sum to Maclay Inns, which runs 26 pubs north of the border, as the operator looks to expand its estate. Crucially, the brewer was also appointed as Maclay’s main beer supplier. Maclay Inns chief executive told M&C Report that the injection of finance from Tennent Caledonian, along with existing support from Lloyds TSB, “means that we can now be active in the market”. M&C Report also understands that another major brewer is set to announce it will invest in a well-known multiple pub operator in the coming weeks.
So as pub closures continue and the on-trade market shrinks, it seems likely that more brewers will look to traditional brewery loans to maintain or increase their market share. The new generation of multiple pub operators, with their ambitious plans to expand, will doubtless be more than willing to oblige.
