Leading analyst Geof Collyer, of Deutsche Bank, has predicted that Greene King’s landmark acquisition of Spirt Pub Company presents a number of longer term opportunities.
He predicted Greene King could be in the right place for any sell-off of Whitbread’s restaurants as it now owns more than 100 sites next to a Premier Inn.
He also said GK is likely to use the deal as an opportunity to be more aggressive with churn at the bottom end of its managed estate.
On lessons that GK can learn from Spirit, Collyer said: “Spirit has always seemed to us to be more advanced in terms of its attitudes to CRM, people training (its retention rates have improved radically over the years), uses of social media for marketing, and generally appeared further up the curve in terms of IT analytics. Spirit genuinely seemed to us to have been ahead of the game. This is maybe not surprising, given the lack of capital to invest, so why not concentrate on investing in your people?
“It was the people story that Orchid also played up, for much the same reasons. But in both cases, the investment in people should have been a priority over the hard core capex. No point spending all that money if you don’t know how to actually run your businesses. That was a lesson that the newly arrived COO at M&B tried to teach Whitbread some years ago in a previous life, and found himself working elsewhere pretty quickly. There are many examples of companies copying each other’s successful trading formats, but it is the operational execution that actually delivers the bottom line result, and failure here can nullify the benefit of the investment.”
On the likely approach to the tenanted and leased estate, Collyer said: ”It is easier to focus on the turnaround of a leased division if it is (i) much more profitable than any other, and (ii) it is considerably smaller. Spirit’s turnaround phase here is now complete, with 78% of pubs having the right licensee and right execution, helped by a significant investment in the calibre of operational regional management.
”69% of the Spirit T&L estate has been invested in, with an interesting array of new agreement models, including fixed and variable turnover rents, with some shared investment. There may be opportunities to convert some of these pubs back into company management but maybe the bigger win is transferring some of the lessons learnt into the Greene King Pub Partners estate.”
On longer term opportunities, he said: “Greene King should be in the right place for any sell-off of Whitbread’s Restaurants if there was to be any change of direction under the new CEO, as GNK will now own over >100 pub restaurant sites that have a Premier Inn next to them, and may be keener to determine a more profit-based arrangement regarding providing food and beverage for Whitbread’s hotel guests.
“We don’t see any pressure to do this, but there could be scope further down the line to demerge a stronger, more profitable, higher quality tenanted & leased Pub Partners division.
“There could be an opportunity to buy in some of the freeholds from either British Land or Cerberus, or, given the latter group’s relatively recent entry into the UK pub property market, maybe sell them some more tenanted pubs.
“Greene King has consistently used its M&A programme not just to add higher quality sites at the top end of its portfolio, but also used these transactions as an opportunity to be more aggressive about bottom end managed estate churn – selling 200 managed pubs and transferring 214 to tenancy.
“The Spirit deal provides more opportunity to for this as well as the potential to reverse transfer some of Spirit’s tenanted & leased pubs back into management. (The entire estate was converted from managed to tenancy following Spirit’s acquisition by Punch Taverns back in 2005/6).
“Entry into FTSE 100 – not an opportunity, but an eventual possibility, given the momentum that should return to the stock after its ‘annus horribilis’ in FY15. Notwithstanding the different business models, post Spirit, GNK will be the fifth most profitable UK stock under our Travel & Leisure coverage (by EBITDA), more profitable than Merlin Ents, IHG & William Hill, each of which has a greater market capitalisation, and two of which are in the FTSE 100.”
