I’ve heard it said that Greene King chief executive Rooney Anand has one last major deal in him before he steps down from the role he has held for nine years. Having backed out of a move for the rump of the Orchid estate earlier this year, could a successful £700m approach for Spirit be his crowning glory?
A combined Greene King/Spirit business would create a true pub behemoth, leapfrogging Mitchells & Butlers as the country’s biggest managed operator with c1,800 sites. That’s roughly twice as many as JD Wetherspoon and with an unrivalled brand portfolio encompassing value dining (Hungry Horse and Fayre & Square), community locals (Greene King’s Locals pubs and John Barras), country dining (Farmhouse Inns, Chef & Brewer) and more premium London-centric sites (RealPubs and Taylor Walker). That’s not to mention the Belhaven estate in Scotland, plus Flaming Grill, Wacky Warehouse and Loch Fyne restaurants.
On the tenanted and leased side, adding Spirit’s c450 units to Greene King’s existing 880 or-so would place the new entity’s tenanted arm above both Star Pubs & Bars (1,100) and Admiral Taverns (1,000) in absolute numbers. It would also be a fantastic route to market for Greene King’s beer brands.
Overall the business would have a combined turnover well in excess of £2bn.
So how might this situation progress, what’s the likelihood that a merger will take place, and what does it tell us about the state of the wider pub sector?
To recap, yesterday Greene King confirmed a Financial Times story that it had approached Spirit about a potential “combination” of the two groups. Spirit later confirmed that an offer of 100p per share had been submitted, but said this “undervalued” the company. Spirit has not commented on the FT’s report that a second 110p bid was subsequently put forward.
Spirit’s statement was cautious. “There can be no certainty that any offer will be made nor as to the terms of any offer,” it said. “Shareholders are strongly advised to take no action.”
While the timing seems to have taken many aback, the fact that Greene King has made an approach at all appears to have been less of a shock.
“I’m not totally surprised,” analyst Nick Batram of Peel Hunt tells M&C Report. “Greene King is ambitious. It looks like it would be a good fit. Clearly there would be substantial cost savings and synergies between the two entities.”
Spirit’s share price rose sharply yesterday, ending up 17.5% to 88.75p. However, Batram, who believes Spirit has been “undervalued for some time”, points out that the figure is still well short of the 110p that Greene King has reportedly bid. This suggests the market is “a bit suspicious” of the approach, he argues.
“The market, on their initial reaction, is saying, ‘interesting, but there’s a long way to go’.
“The investors in Spirit are generally very positive about what the management team are doing there and I don’t think they would be willing to sell out on the cheap, so we’re not talking about Greene King stealing the business from under the nose of the shareholders - that’s not going to happen in my view.”
Simon French of Cenkos Securities also argues that synergies between the two companies would be “material” and a combination would “make sense”, although he cautions that there may be some competition issues in local areas.
However, French says it’s “surprising” in the context of recent pronouncements from the firm about its focus on growth from outside the traditional managed pub model.
What about the leased and tenanted estate? Greene King has made it clear that it does not see its future being with traditional tenancies and leases. Indeed, earlier this year the company off loaded 275 sites from its Pub Partners estate to Hawthorn Leisure, the new tenanted pub company backed by Avenue Capital and May Capital.
One answer would be a quick sale of many or all of Spirit’s leased estate - and perhaps Greene King’s as well - with Hawthorn and Admiral Taverns’ backer Cerberus the most likely buyers. Last week the latter proved its continued willingness to invest in tenanted pubs with the acquisition of 111 sites from Star Pubs & Bars’ owner Heineken UK.
However, one industry expert believes it may not be so simple. He estimates that Spirit’s Leased estate pubs are perhaps twice as profitable as the package of 111 sold to Admiral, with Greene King’s maybe 50% higher, suggesting a hefty price tag can be expected for a tranche that could exceed 1,000 pubs.
“The market will struggle to absorb all that. It needs a lot more than Admiral and Hawthorn can pay for it.”
Batram, for one, doubts whether the leased estate would hamper Greene King’s bid. He points to the above-average quality and size of the leased assets and the turnaround under Chris Welham. At its most recent trading update for the 12 weeks to 16 August, net income growth in Spirit’s leased division accelerated to +4.8%.
Batram says Spirit’s leased arm is “less of a problem child” than its counterparts at other pub companies. “I think as leased estates go, the opportunities and the quality of the Spirit estate is pretty good. If [Spirit is] the most attractive opportunity on the block, I don’t think it’s such a negative, such a drag, that it will put them off doing a bigger deal.”
But complications remain. There’s a question mark over how Greene King would finance the deal, given that most of Spirit’s sites exist within its debenture. It may require Greene King to sell some assets, particularly if, as many are suggesting, it becomes an acquisition rather than a merger and Spirit’s shareholders expect some cash in return.
Another complication regards the tenure of Spirit’s estate, with 400 sites across both division held on a sale and leaseback basis. “Greene King doesn’t like that sort of stuff,” says one source.
Greene King has been given a ‘put up or shut up’ deadline of 5pm on 21 October, so no doubt these issues will be mulled over carefully in the coming weeks as the company choses its next course of action.
Mark Brumby at Langton Capital believes Greene King will persevere. “Why would Greene King make an approach if they didn’t intend to bid? They made the approach with the intention of doing it, so I think it’s quite likely something does happen.
“Units of the quality of Spirit’s estate don’t change hands very often. You could persuade yourself you’ve got to have a crack because this is your chance - it’s a bit like Scottish independence. If you do that there’s more upside for shareholders, but if Greene King does that there’s every reason for Mitchells & Butlers to do it as well, for exactly the same reason.”
Brumby predicts a “phoney war” will break out as shares are traded over the coming days in anticipation of Greene King’s actions and those of its rivals.
French says Greene King’s bid has the potential to “kick start M&A in the pub and restaurant sector”. “I’m sure there will be other companies out there that will be looking at a potential combination with them if they can get to a price that’s north of 100p-a-share.” He mentions Marston’s, M&B and Stonegate as possible alternative suitors for Spirit.
Incidently, he does not hold the view that Anand is looking for one final big deal to mark his time at the helm of Greene King. “Rooney has done a lot of deals in his tenure as CEO and I’d look at this in the context of a continuation of his deal making rather than any last hurrah.”
Either way, it’s hard to deny now that M&A is firmly back on the agenda for the pub sector. Whether it results in the biggest pub deal in recent history remains to be seen.
