Inside Track by Peter Martin
Britain’s pub industry seems to have achieved something even Mao’s Communist China could only aspire to – reaching a state of permanent revolution. A potent combination of internal and external forces has conjured up a situation where the only certainty is change. What’s happening at Spirit Group, the country’s biggest managed pub player, is a good example. This is not so much about chief executive Karen Jones’ impassioned drive to switch the emphasis of smoking in her pubs, which of course could have a significant long-term effect on the character of the British boozer. More importantly it is the strategic financial planning that is now going on at its Baker Street and Burton-on-Trent offices – and the consequences this will have for the rest of the sector. Spirit is well advanced with plans to sell-off 300 or so sites, despite its efforts to play down speculation. This is seen in City circles as a precursor to a major refinancing package before the end of the year, and a potential stock market float early next. These events will have important repercussions across the market, which may well lead to another major shake-up in the sector’s structure. The first question is who will buy the 300 pubs set for disposal? Most bets are on the big tenanted and leasehold companies, on the assumption that most will be lower turnover houses. Spirit may, of course, also seek to dispose of some of its less attractive high street leasehold sites. If the bulk does go to the tenancy companies, it will on-the-face-of-it see a further shrinking of the total managed house market, although with the number of deals the likes of Punch are doing with smaller multiple pub operators the boundaries between what is tenanted and managed is becoming increasingly blurred. The bigger speculation is over Spirit’s anticipated IPO. There is little doubt it is on the agenda, but not everyone is confident it will actually happen. The current stock exchange pressure on JD Wetherspoon and the moderate market performance of Mitchells & Butlers, Spirit’s closest rivals, all cast doubt on the return investors would achieve. Some City watchers think that Spirit might eventually have to be sold, and that would likely see it being split up to gain maximum profit. The knock-on effect of that scenario will have the dealmakers licking their lips. Whatever happens to Spirit in the next six months or so, the spotlight will eventually turn to M&B, which has steadfastly resisted analyst "advice" to go out and buy something. Pressure will invariably grow for M&B to fulfil its promise to be the market’s great consolidator. So far its property activity has been restricted to a tidying-up of its freehold estate, most recently by quietly selling off high street leased sites to restaurant operators such as Wagamama and Carluccio’s. Of course, this is all just highly contentious speculation, but it is indicative of the uncertainty and scheming that surrounds the pub sector. Nothing is straightforward. It has to be remembered that the last 12 months have seen the disappearance of Scottish & Newcastle Retail (we are only now approaching the first anniversary of the Spirit takeover), the virtual disintegration of Laurel and Noble House, supposedly two of the prime market shapers, and Regent joining SFI in the intensive care ward. So who would safely want to predict the look of things this time next year? Greene King and Wolves & Dudley are now positioned as the new big league managed pub challengers, with a newly privatised Yates Group, said to be hovering round the remnants of Laurel, and Barracuda, a company that was a mere start-up four years ago, next in line. But there’s no guarantee that will remain the case, either. Unfortunately, there is no Little Red Book of how to act or react to this volatility – simply expect the unexpected.