NewRiver, the listed UK REIT, is believed to be in advanced talks to acquire Hawthorn Leisure, the c300-strong pub operator, in a deal thought to be valued at more than £100m, MCA understands.
Hawthorn, which is currently owned by its Gerry Carroll-led management team and Avenue Capital, the US-based c$14bn (£10.6bn) private equity and property fund, appointed Sapient Corporate Finance to review its options earlier this year.
NewRiver is understood to have moved ahead of Admiral Taverns and Punch in the race to acquire Hawthorn.
It is thought that NewRiver, which entered the pub sector with the acquisition of a portfolio of 202 pubs from Marston’s in October 2013 and followed that with the acquisition of a portfolio of 158 pubs from Punch Taverns in August 2015, has been keen to cement its pub operating credentials.
Earlier this year, the company told MCA that it was assessing further individual site and group deals in the sector.
If successful, the deal will not only see it add a further c300 pubs to its portfolio, but it will also allow it to strengthen its operational expertise, with Hawthorn’s management team, led by former Enterprise Inns director Carroll believed to be in line to stay on and supplement NewRiver’s existing team, led by David Shipton.
Alongside c250 tenanted pubs, Hawthorn operates c40 “managed sites”, which are operated under an operators agreement that has evolved from the Beacon Retail Partnership Tenancy Agreement that Carroll pioneered at Enterprise Inns (now Ei Group). It is thought that NewRiver may look to convert a number of its existing pubs to this agreement.
It might also take advantage of new supply chain agreements with Marston’s (England & Wales) and C&C Group (Scotland), which Hawthorn agreed last June.
Hawthorn saw group EBITDA increase 10.1% to £9m in the 12 months to 25 December 2016, its third year of “significant growth” since its creation in May 2014. Group EBITDA is currently thought to be running comfortably ahead of that mark.
Hawthorn was created with the acquisition of 275 Greene King pubs in May 2014 for £75.6m, followed closely by the purchase of 88 tenanted and leased pubs from R&LP, the pub portfolio formerly part of Robert Tchenguiz’s property empire in a deal believed to be valued at c£30m.
This was followed by the acquisition of Nectar Taverns, which operated 25 wet-led managed houses in the north-west, in a deal valued at c£10m. In April 2016, it added to its managed arm with the purchase of 11 pubs from JD Wetherspoon in a £5.8m deal. Those sites sit under managing director of operations Mark McGinty – who worked for JDW for 17 years – supported by an executive team with significant managed house experience.
The company has since disposed of around 100 non-core pubs.
Comment by MCA’s Mark Wingett
Then there was three? When earlier this week, Ei Group (formerly Enterprise Inns) chief executive Simon Townsend said the company planned to concentrate on investing in its existing estate rather than making acquisitions, it was assumed that any consolidation in the UK’s tenanted and leased sector would be left to Admiral Taverns and Punch. Both had new backers and both were keen to add to their existing estates. Indeed, the Patron Capital-backed Punch has already dipped its toe in the water with the acquisition of Laine Pub Company.
However, with the potential acquisition of Hawthorn Leisure, NewRiver has put itself forward a viable third option. Until now, most in the pub sector, myself included, had seen NewRiver’s movements in the pub sector as a sideshow to its retail and development operations. A successful deal for Hawthorn, which would come complete with an experienced and rated management team, plus a “managed arm” should change that perception.
It could also prove that a Real Estate Investment Trust (REIT) can work as a model in this sector, something that Townsend and Ei Group will also note with its stated long-term goal of converting to a REIT.
As NewRiver’s chief financial officer, Mark Davies, told MCA earlier this year, the group’s long-term plan is for pub assets to account for c20% of the wider portfolio value. With the current valuation at around c£1.5bn, he said that allowed scope for the pub estate to grow from its current size of c£170m to c£300m. He stressed that as the wider valuation continues to grow, pubs are expected to keep pace.
He said: “We are long-term investors in the pub sector and it’s an area we see a lot of potential in. It’s going to be an interesting year in terms of what is available and we’re keeping a close eye on what is happening. There’s certainly one large package that would be of interest. Equally we’re happy to pick up individual sites.”
The company spent £2m on capex last year and has a further £1.8m signed off for this year, outside of the funds generated from the partnership with the Co-Operative group to build convenience stores on surplus land. So certainly it has the power to invest in its acquisitions and support further growth.
Talking to MCA last year, Carroll said that Hawthorn had ambitions to consolidate the UK’s pub sector further and grow into a significant player. He said that the group’s ambition is to eventually own and operate a business of between 1,000 and 2,000 pubs.
Carroll said the company would be keeping a close eye on the fallout from the Punch-Heineken deal and that it expected further disposals from Greene King’s leased and tenanted division in due course. The ambition was always to become “a long-term player in the sector”.
Carroll was obviously hoping he would secure the investment to match his stated ambitions for the business, and to make hay while the sun shine’s on the UK’s pub sector. Tenanted pubs are currently performing in line with, and in many cases ahead of, managed pubs. At the same time, the tenanted model has less operating risk, which along with strong cash generation, means it continues to appeal to property investors like Cerberus, Proprium and Patron. The appeal to brewers like C&C Group, is obvious: further routes to market for their brands.
There will continue to be consolidation in the leased and tenanted market, with both “New Punch” – backed by Patron - and Admiral stating that they want to expand. The proposed deal for NewRiver, aided by Hawthorn’s performance over the last four years and its ability to operate both tenanted and managed estates, plus its own funding model and expertise could put it in a prime position to play a key role in that consolidation play.