Inside Track by Mark Stretton
Now that Alchemy Partners has been lined up to buy Spirit’s high street pub division for about £175m, a far more interesting question has arisen: can Spirit perform alchemy with the rest of the business? Speculation is intensifying that the companies that own Spirit are about to call time on their investment. But messages are mixed. There is no consistent view from within Spirit’s boardroom. Chief executive Karen Jones is clearly not ready to relinquish control and its private equity owners, which comprise Blackstone, CVC, Texas Pacific Group and Merrill Lynch, are said to be at odds over the exit strategy. Although TPG was quick to deny shareholders are "at war" with Jones. Stephen Peel – of TPG – said: "Spirit, its management and its key shareholders are totally aligned on all of our options." The swift rebuttal by TPG came because it is understood to favour further asset sales to reshape the business ahead of an IPO. But sources have intimated that not everyone is necessarily "aligned". Blackstone is ready to sell by breaking the business up. The company does appear to be grooming itself for a sale. It has stepped up its discounting activity across the business in an effort to drive sales. It feels as though something needs to happen. When it bought S&N Retail, it tried to apply its own "better, faster, lower cost" model, designed for pubs that were then producing weekly sales of £7,000 to a business that was producing about £15,000. It is a questionable strategy and the performance of the business has been disappointing. Certainly the assertion that abject first-half figures were the result of widespread consumer downturn did not stand up in light of figures from other operators, such as Mitchells & Butlers. That said the business is effectively less than two years old and management probably need more time. Whether they will get it remains to be seen. Certainly the performance in the second half has improved. In financial terms Spirit has been a resounding success. Its shareholders have extracted almost £3bn through asset sales, disposals and refinancings. But what now? It appears to have backed everything on an IPO this year. This is now not possible given its performance. There is also an issue with the management team, which has yet to prove itself. An auction would spark a great deal of interest with Mitchells & Butlers, Whitbread, Greene King, Wolves and Punch at the head of the queue. Clearly key to this decision is the value a break up would realise. To that end bankers at Merrill Lynch have been chatting to various parties on behalf of Spirit’s owners in recent weeks, in an effort to understand where the market is. One of the key issues is that Merrill is not keen to entertain the idea of consortia bidding for the business, preferring to only consider a single buyer. This seems to be motivated by a belief that a consortium would chip away at the price more so than an individual party. But if Spirit’s owners are to realise maximum value they will need to break it into at least two packages to suit potential vendors. M&B and Whitbread would want the large-scale food-led houses, Punch would want the bottom half to convert to lease, while Wolves and Greene King would be interested in a the top and middle parts. It may be that two of these potential bidders come together – Punch and Wolves teamed up last year in an abortive bid for Laurel’s community business. The biggest hurdle is the financing structure against half of Spirit’s estate, which runs across all of its various brands and parts. The nominal cost of undoing it is horrendous but there is always a deal to be cut. With an IPO looking increasingly unlikely, Spirit’s owners may have little choice. Timelines: the corporate history of Spirit Group Sep 2005: Spirit City Day & Night sold to Alchemy Partners Dec 2004: Sold 364 pubs to Globe Pub Company, an R20 company, for £345m Nov 2004: Completes £2.1bn refinancing, including £1.2bn securitisation Oct 2004: Enters 30-year sale-and-leaseback with British Land for 65 sites, raising £174m Jul 2004: Sells Premier Lodge – 141 hotels plus 19 pubs – for £536.2m Mar 2004: Enters 30-year sale-and-leaseback with Prestbury for 220 pubs, raising £500m Nov 2003: Acquires 1,400-strong S&N Retail from Scottish & Newcastle for £2.51bn Feb 2003: Buys 75-strong Tom Cobleigh group from Electra Partners for £106.4m Apr 2002: Demerged from Punch Taverns, forming 1.035-strong managed house group. Oct 1999: Punch formed from 3,500 Allied Domecq pubs. 560 sold to Bass. Sep 1999: Karen Jones appointed CEO of managed division (Punch Retail).