Inside Track by Mark Stretton
Andrew Knight was last week appointed to the Punch Taverns board. A long-standing Spirit executive, Knight took the top job in February, and the move was recognition of the roll he has played in leading the ensuing major surgery at Spirit. But although a very capable individual, he may not occupy a seat at the Punch top table for very long. There is a great deal of talk among equity analysts and City institutions of a £2bn sale of the Spirit business in the first half of 2007. Giles Thorley, the Punch CEO, told me last week that his “gut feeling” would be that Spirit will remain a part of Punch in the medium term. But that will all change if he can realise a sizeable profit on what Punch paid for the business last Christmas. If Punch were to sell, the most obvious exit would be an IPO. Although Mitchells & Butlers is the obvious trade buyer, it has already let the business go to others twice before – when it was 25% cheaper, and when there were a good deal more costs to be taken out. That said, the painful surgery of rationalising the business and taking the obvious step of moving large swathes of pubs to a lease business, has been done, making it a much cleaner deal for a large-scale bespoke managed operator. Given that a sale of Spirit cannot be ruled out, it was not that surprising that Punch Taverns was bullish about the impact of a smoking ban, when it unveiled full-year figures last week. Thorley suggested the ban – already in place in Scotland and due in England in July – would have a limited impact on the industry. It is a moot point. Although to my mind it is not creditable to suggest that smoking will be positive, certainly not in the short term, the truth is it is far too early to say what kind of impact it will have. A bit like it is too early to say what impact the purchase of Spirit will have on Punch. To make the Spirit deal a success Thorley must either sell it at a significant premium to what the company paid, or Punch must prove that it can run Spirit better on a longer-term basis. There are many moving parts that will affect Spirit’s success – the smoking ban, the remaining asset sales, the conversions to lease and possibly the stock market and potential buyers’ appetites. It is also worth noting that according to analysts Spirit spends less on maintenance expenditure, on pub investment and on central support than its peers. It may be that it is just run better, but it may be the case that more cost needs to be applied, rather than taken out, to grow the business longer term. There was talk last week of Punch returning to the acquisition market, adding more managed pubs, rather than disposing of any. Wolverhampton & Dudley Breweries, which has missed a few deals of its own lately and has some growth issues in its brewing arm, was identified as a possible target. In reality, there are few people in or out of the Punch boardroom, who know what the plan is. Whatever happens, it is worth remembering what a young and dynamic place the pub market is. There are of scores of pub groups – such as Barracuda, Laurel, M&B and Spirit – that didn’t exist a few years ago. Even Wolves and Greene King are unrecognisable from the companies they were a decade ago. Change has been one of the few constants and that characteristic is the one thing that won’t change in this marketplace.