Capital Pub Company’s reasoning behind its rejection of two takeover approaches by Fuller’s, which was laid out in its full-year results yesterday, has brought a swift and detailed response from the brewer and pub operator, as it reiterated it would still like to work toward a recommended transaction.
Fuller’s has moved quickly to clarify its April offer of 200p per share for Capital, which gives the London-based pub operator, an enterprise value of £83.1m, including derivative liabilities of £3.2m.
In particular, Fuller’s was keen to emphasis that the Ebitda multiple of the offer was in its view favourable compared to other recent deals featuring Realpubs and Geronimo Inns.
Fuller’s said that using Capital's reported Ebitda before exceptional items and share option charge of £6.4m, its possible offer would value Capital at “12.9x FY11 Ebitda. Fuller's possible offer values Capital at 9.3x FY11 house Ebitda”.
In a statement, Fuller’s said: “This compares favourably to the implied forward multiple paid by Greene King for Realpubs, where freehold assets comprised 93% of its estate, of 8.4x next year's house Ebitda (source: Greene King acquisition announcement, 27 April).
“Regarding the comparison to the Geronimo Inns acquisition by Young’s the acquisition was announced in December, almost six months following Geronimo's year end. Whilst the implied historical multiple for the year ended June 2010 was 9.8x house Ebitda, the implied multiple for the year ended June 2011 was 7.3x house Ebitda (Source: Young's acquisition announcement, 16 December 2010).”
“Capital has disclosed that freehold assets represent 85% of its estate. Fuller's believes that this includes two sites where Capital has the option to acquire the freeholds rather than owning the freeholds. As such, Fuller's calculates that owned freehold assets account for 79% of Capital's estate.”
Fuller’s, which again said it would like to establish a constructive dialogue with Capital, also placed a question mark against the 34-strong group’s stated growth strategy.
It said: “It has taken Capital over 10 years to grow its estate to 34 pubs and Fuller's believes that the strategy to grow the estate by a further 11 to 16 pubs (which represents a 32 to 47% increase in the estate) over the next two years has considerable risks associated with its execution which could dilute the overall quality and attractiveness of the estate and which could have a negative impact on valuation over time.
“Fuller's believes that the announcement yesterday of the acquisition of The Priory, a smaller leasehold site, reaffirms its concerns that in seeking to acquire sites quickly, Capital risks compromising the overall quality of its estate and diluting the freehold/ leasehold mix.”
Despite Capital announcing yesterday that it had agreed in principle with its bankers to increase its banking facilities by £5m, Fuller’s believes that the company will need to raise further equity to fund its growth strategy.
It said: “Since 27 March 2010, Capital has issued approximately 6.3 million shares. Notwithstanding the disclosed agreement in principle with its bankers to increase its banking facilities by £5 million, Fuller's believes that Capital will most likely be required to issue further equity to fund its growth strategy should it wish to continue acquiring freehold assets in London.
“Fuller's believes that this will result in Capital's existing shareholders either having to invest additional equity or be diluted further by new equity investors going forward.”
Fuller’s said that it continued to believe that it is in the interests of Capital's shareholders for the board of Capital “to engage with Fuller's in order to deliver an attractive cash offer in a timely manner”.
It maintained that its possible offer of 200p per share represented a “very attractive price for Capital's shareholders”, being a 53% premium to the share price immediately prior to Fuller's initial approach, and that the proposal would provide Capital shareholders with “the certainty of a cash exit in the near term”.
Shares in Capital, which yesterday reported a climb in full-year like-for-like sales in excess of 7%, closed at 200.5p.
