Inside Track by Mark Stretton
The current level of deal activity in this market is almost frenzied. Citigroup will this week circulate an Information Memorandum to those companies interested at a closer look at Barracuda, the pub and bar operator owned by PPM Ventures. At the same time R20 is expected to complete its £200m deal to buy Yates Group (this Friday) while Spirit Group will review first offers for the 173 high street pub-package it recently put up for sale. It looks like another normal week in licensed retail and speaks of an extremely fluid market. Several factors are driving this frenetic period. After a period of improved trading (relative to what went before) there are actually buyers for high street assets. This is a fairly recent phenomenon. Many owners of high street assets, such as PPM, have short ownership cycles and have probably been waiting to exit for a while. At the same time managed house economics are not particularly strong at the moment – or at least, they are not getting stronger. Business in general is in a period of rising costs from a myriad of sources including minimum wage, rising utility costs and business rates and increased, costly legislation. The threshold for managed pub businesses is fast moving towards annual unit Ebitda of £150,000. As well as added pressure on margins, some companies seem concerned about the ability to grow sales. Some signs have emerged from the retail sector of a consumer slowdown, most recently a profit warning from Kingfisher, the owner of B&Q. Whitbread and Spirit Group have both warned of a toughening consumer market, although how much of their pain is sector-wide rather than company-specific, remains unclear. Another factor driving deal activity is that the debt markets are strong and have been for a long time. Some are worried that this could start to change this year. Perhaps the biggest single factor driving deals is the influx of property companies who, looking for superior yields to traditional property investments, have become willing buyers of pub assets. These companies include Admiral Taverns, British Land, London & Regional, The Pears Family, Prestbury, Provence and Trevor Hemmings. Some of these companies, such as Robert Tchenguiz’s R20, operate a "PropCo-OpCo" model – where the property value is separated from the value of the operating business – and are consequently prepared to pay unprecedented multiples for these assets. Tchenguiz particularly brings a certain freshness of thinking. His current bid for Somerfield, the UK’s fifth biggest supermarket chain, includes a strategy to develop luxury residential apartments above some stores to maximise the property return. Tchenguiz is one such buyer who sees value in the high street. If he lands Yates as expected, it will be added to Laurel Pub Company to form a 300+ bar business. At the same time he is understood to be biding for SFI Group and Luminar’s Entertainment Division, which could double his business again, and is also looking at Spirit’s high street package. Technically he could soon be the owner of a 700+ high street bar business. It will be interesting to see if R20 makes a run for Barracuda. Mark McQuater, Barracuda’s chief executive, is understood to be planning a secondary buyout with new private equity financing. The recent refinancing of Mill House Inns, which went for (a huge) £90m, shows that management teams can still outbid trade buyers and property companies but he is bound to face competition from a raft of buyers, all interested to get their hands on the widely-admired business he has built. Elsewhere in the market Luminar is thought to be in talks with Close Brothers Private Equity regarding the disposal of a separate 53-strong package of "non-core" nightclubs to the current management, Avanti Capital is selling its Po Na Na business, and there is also speculation that the sale of Heritage Pub Company is back on. There are also sale rumours regarding Henry J Beans and the Bar Estilo / Red Peppers businesses. As David Coffer, of Davis Coffer Lyons, which is overseeing the sale of eight businesses including Little Chef, said recently: "I have never experienced such a buoyant and bullish market in the sale of leisure-related businesses." It certainly is a buoyant and busy market. The big question is whether it is peaking – and the answer probably lies with the private equity owners of Spirit Group.