After striking a deal that shocked the sector, Stonegate looks set to become the biggest pub operator in the UK. MCA editor James Halliwell looks at whether the acquisition is a positive one for each side, whether the deal represents good value, and what is coming next.
The acquisitive Stonegate has just made its biggest acquisition yet. By far.
Buying Ei Group transforms Stonegate into the biggest pub operator in the UK overnight, less than a decade after it was founded in August 2010 by TDR Capital to purchase 333 pubs from Mitchell & Butler.
Stonegate steadily grew to a 765-strong estate, populated by brands including Be At One, Yates’s, Walkabout and Slug and Lettuce. Then, on 18 July 2019, it took a huge leap forward by snapping up the EIG estate, which is made up of over 4,000 pubs, in a £2.96bn deal.
The all-cash offer, of 285p per share, put a 38.5% premium on the closing price of EIG shares before the deal was announced. They reached a high of 289p yesterday morning and currently stand at 285p.
EIG directors intend to vote unanimously for the deal, which is set to become effective in early 2020, subject to regulatory approval.
Analysts Liberium, which believes the rationale for the deal is “compelling” also says Stonegate has factored in the inevitable intervention by the CMA by agreeing to dispose of up to 100 pubs, though this would still give Stonegate around 11% of the market.
“The CMA will certainly look at it without a shadow of a doubt, they can’t not because of the scale of it,” says MCA contributing editor Peter Martin. “I can’t see them blocking it, but they will always look at local monopolies, there may be some sell-offs, there will be some pressure to dispose of some sites.
“Where it may become an issue for them is places like central London and other city centres, where some sites will overlap. But the key thing is that the deal looks like it’s been planned for some time, and it looks fairly neat and tidy. Certainly the institutional EIG shareholders look to have been onside for some time, so it looks like a well set-up deal, and it does make sense.”
EIG certainly think so. Robert Walker, chairman of EIG, said the deal will deliver an “exciting future for our tenants and employees by creating the leading managed and tenanted pub company in the industry. The commercial benefits of combining the companies are compelling.”
He added that Stonegate was “committed to continuing to invest in the business for the future benefit of the combined business, tenants and employee” and that the EIG board “believes that this is a combination it can recommend with confidence to shareholders and stakeholders alike.”
At the same time, Ian Payne, Stonegate chairman, said the prospect of bringing the two businesses together was “exciting” and would create a “diversified pubs group with significant industry expertise.
“We have an established track record of running successful pubs throughout the UK with over £350 million having been spent on capital expenditure at Stonegate since it began trading in November 2010.
“We plan to leverage our existing managed house infrastructure, portfolio of formats and access to capital and invest in the combined estate for the benefit of all stakeholders. We look forward to working with EIG and its publicans to support future growth and create stronger pubs at the heart of communities across the UK.”
From the outside, it looks like a “good deal from both sides,” says Marston’s CEO Ralph Findlay.
“Ei Group has done a good job in repositioning its estate in recent years, and Stonegate have become an even more important player in the UK pub market. To me, there is a real logic in running an integrated managed, leased & tenanted estate, but then Marston’s has always done that.
“I also think it highlights the attractions of pubs from an investment point of view, and that pub estates have been undervalued by the market. That has provided Stonegate with the opportunity.”
Though Peter Martin says there “was some surprise” in the market when the deal was announced, he also says “there was also a sense there is logic about it. Obviously Stonegate believe there are synergies that will work.”
Certainly, Stonegate has a “strong track record for acquiring, integrating and converting pubs,” says Douglas Jack at Peel Hunt. “The combined estate should provide a substantial pool of pubs to either convert from leased to managed or sell”.
And the acquisition “should enable Stonegate to at least triple its EBITDA. We estimate EIG’s EBITDA growth and debt reduction strategy would have taken until 2022E to reach 285p/share of equity value.”
Peter Hansen, from Sapient Corporate Finance, says it’s a “very sensible deal for Stonegate and Enterprise, whose share price has been growing over the last year as people appreciate the underlying value of tenanted pubs. This deal reflects that.
“For Stonegate there are a lot of very high quality leased and tenanted pubs in the Enterprise estate, it’s probably the best leased and tenanted portfolio in the UK, and there will be a number of managed opportunities in it. When the leases come up for renewal a lot of the pubs will probably be converted into a Craft Union pub or a typical Stonegate managed pub.
“There is a lot of upside for both parties. Stonegate brings a very strong performance on managed pubs, Enterprise has done a very good job with Craft Union, which is growing leaps and bounds, and they are probably the industry leader in that area. I think their skills are complimentary and Enterprise estate is second to none in the leased and tenanted space.”
Hansen adds it’s “unclear how the management structure is going to work out, whether Simon Townsend will stay or whether he will go as part of the deal (the statement released to the London Stock Exchange states ‘it is expected that the Chief Executive Officer and Chief Financial Officer of EIG will leave EIG with effect from the Effective Date’ so there is no absolute clarity there, but in this exclusive MCA interview with EIG, Townsend puts the record straight).
But Hansen adds that “Simon Longbottom (who speaks exclusively to MCA on the deal here) used to run the Greene King leased and tenanted estate before he joined Stonegate, so Stonegate should have no problems integrating the Enterprise estate into the Stonegate business. In fact, no-one has more experience at doing acquisitions than Stonegate does, albeit not at this scale.”
In short, Stonegate should have no problem carrying out its stated plan to continue EIG’s existing strategy. “The Stonegate team has experience,” says Martin.
“Simon Longbottom understands all the sides of the EIG business (which is split into three business units, publican partnerships, managed pubs and commercial properties) so it’s not as if they are buying something they are unfamiliar with. It will be interesting to see how they run that leased business going forward.”
As for whether the price paid by Stonegate represents value, Douglas Jack says the night before the deal was announced, the “closing price was 206p/share, EIG was on 9.5x EV/EBITDA, the same multiple that Punch Taverns was acquired on in August 2017. When Punch Taverns was listed, EIG consistently held a 1x EV/EBITDA premium, so 10.5x EV/EBITDA would have been the absolute minimum exit multiple for EIG, in our view.”
Martin believes EIG shareholders will be “biting Stonegate’s hands off. I think they will be happy, and it certainly won’t be blocked by the shareholders, because they have got a premium from it.”
And Hansen says that “today, on a standalone basis, it would be viewed as a full price. But I think in four or five years everyone will look at it and think ‘What a great deal that was for both parties’. And for Stonegate, in particular.”
How Stonegate became the biggest pub operator in the UK
- August 2010: Stonegate is formed by private equity outfit TDR Capital to buy 333 pubs from Mitchell & Butler for £373m.
- June 2011: Stonegate merges with Town & City Pub Company to create a 550-strong portfolio of pubs.
- August 2013: Stonegate spends £10m on 13 sites from Premium Bars & Restaurants.
- November 2013: After the Bramwell Pub Company goes into administration Stonegate snaps up 78 pubs for £35m, taking it to 623.
- June 2015: Stonegate buys 15 sites from Maclay Inns.
- September 2015: Now the fourth largest managed pub company, Stonegate buys 53 pubs from Tattershall Castle Group.
- September 2016: A year later, Stonegate takes 10 Wetherspoon pubs. It now has 664.
- December 2016: Stonegate goes Walkabout, buying up owner Incertain and adding 30 more pubs to its estate.
- February 2017: Stonegate heads back to Wetherspoons to add two more pubs, and it picks up three from Faucet Inn at the same time. It now has 693 pubs.
- September 2017: London is the focus as Stonegate buys the Sports Bar & Grill operation, giving it 703 sites and moving it into London train stations for the first time.
- July 2018: Be At One, which operates 35 sites, and Novus Leisure, which has 15, both become part of the Stonegate operation. Stonegate plans to retain the Be At One brand, its eighth.
- January 2019: Stonegate buys Bar Fever, which has 32 sites. It also buys another six from Novus Leisure.
- July 2019: Stonegate buys Ei Group and becomes the UK’s biggest pub company, with over 5,000 pubs.