Inside Track by Mark Stretton
If there were any doubts as to what Robert Tchenguiz was going to do with Laurel when he bought it last December, there can be few now. Having snapped up Yates for £202m last Friday, the property magnate has made his intentions abundantly clear. Consequently the long-awaited consolidation of the UK high street is moving from theory to reality. "I want to get to 1,000 managed pubs," he told The Sunday Times’ Matthew Goodman at the weekend "We are bidding on several of the pub businesses that are on the market right now. We should be able to win them all." Having captured Yates to form a 320-strong high street bar business that includes chains such as Casa, Ha! Ha!, Hog’s Head, RSVP and the eponymous Yates brand, his private equity arm R20 is now expected to go after the Spirit package of 173 bars. If successful Tchenguiz, together with his chief dealmaker Aaron Brown, will add chains such as Henry’s and Bar 38 to his burgeoning high street business, taking his spending spree on pub assets in the last six months to almost £1bn. As well as Spirit, R20 is said to be looking at Barracuda although it will face competition from private equity and is also bidding for SFI Group, although this one has a way to go given that the bids on the table do not match the company’s valuations. Tchenguiz is still a shareholder in Regent Inns. He did top-slice his holdings from 14% – understandable given that the price has almost trebled – but still owns more than 10%. If you look at what Tchenguiz has bought, or is trying to buy, it is more than JD Wetherspoon, and that took Tim Martin 25 years to build. There are several interesting strands to Tchenguiz and his high street strategy. His business instinct is anti-cyclical – most companies are trying to reduce their exposure to the crowded and volatile town centre segment of the market. Public companies continue to speak of a tough high street market, breaking out the numbers when reporting results so investors can see how difficult it is. Consequently there are plenty of willing sellers of high street pub assets. A crucial factor is Tchenguiz’s access to cheap money. He optimises finance in a way that has not really been seen in this market before. By operating a dual property company and operating company structure, dubbed of late the "Propco-Opco" model, he can leverage unprecedented levels of debt. He looks at the assets purely as a property play – and leverages debt based purely on rental income. He then takes the trading company and leverages debt based purely on cashflow and profits. He effectively refinances the business twice. Part of the Laurel business is leasehold and Tchenguiz takes a tough line on either renegotiating the rent or handing the keys back. He has also already started to assign non-core properties, not to pub operators but restaurant groups such as La Tasca, Wagamama and YO! Sushi – all hungry for high street locations. Then there is the operational improvements that can be made at Laurel. One of the biggest opportunities is food. Laurel has food sales of about 10% and Yates, of about 16%, yet the growth of eating out is one of the key demographic trends in this market, one that Laurel chief executive Julian Sargeson plans to exploit. Tchenguiz will save at least £6m in head office costs from Yates and more through increased buying power. That is presumably how he was able the pay some £40m more than GI Partners bought it for last summer. As the company’s high street scale grows, the multiples it can justify will only increase. So there probably is little reason why he cannot "win them all". And it IS a tough market. There are a lot of very difficult challenges facing the industry such as social responsibility, problem drinking, smoking, licensing, all of which is more difficult on the saturated high street. But Tchenguiz sees opportunity. Consolidation in the high street pub market is important and the rewards are there for those prepared to take the lead. As one executive close to the action told me last week: "Ask yourself this: ‘in a few years will people still be walking up and down high streets in the UK wanting something to eat or drink?’ Of course they will. This is about being brave now for the upside in 2009 or 2012. That is the essence of private equity."