Inside Track by Mark Stretton
It’s fair to say that the Whitbread mandate handed to bankers at Morgan Stanley, to find a buyer for 220 pub restaurants, is not the toughest job kicking around the City. The biggest issue will be crowd control. The auction of a selection of Brewers Fayre and Beefeater outlets will spark a riot. Greene King, Mitchells & Butlers, R20, and Wolverhampton & Dudley, will vie with a clutch of private equity houses such as Alchemy and GI Partners, and a smattering of property players. It will be interesting to see if Punch comes to play. Although it would appear to be busy enough with Spirit, it has about 80 managed pubs that sit next to a Premier Travel Inn raising the prospect of appealing deal involving site swaps. Ted Tuppen may also be tempted to bring Enterprise Inns out of M&A retirement, although whether these large-scale sites would make appropriate leased pubs is questionable. The assets in question, practically all freehold, produce underlying profits (before central overheads) of between £45m and £50m. If the price matches the pre-overhead multiple paid for Spirit of 7.8x, it will be sold for about £400m. In reality the price will be much higher. Corporate advisers I spoke to over the weekend suggested these assets could go for anything up to 12 or even 13 times - £600m to £650m. This is driven partly by the freeholds, which will draw property specialists and exponents of the propco-opco model. It will also be driven by some highly acquisitive and determined operators such as R20 and Wolves. And it will be driven by necessity. There is a perception that M&B needs this deal. The prospect of M&B and R20 going head to head will be fascinating. The auction could have implications for the long-term aspirations of both companies. If M&B wins it will have the opportunity to apply its superior brands and fulfil its consolidator aspirations. If R20 wins, it will claim that it – and not M&B – is the consolidator of the managed house sector. Although historically cautious, M&B can be expected to really push the boat out, especially considering how explicit it has been in its interest. It has openly stated its desire to buy these pubs and it confidence improving their performance. Executives at M&B suggest its pub restaurants are currently 70% more profitable than those operated by Whitbread. So arguably these pubs under M&B’s ownership will produce underlying profits nearer £80m, although the capex spent along the way would be significant. But eight times £80m is £640m. M&B has more intellectual capital through the brands that it operates, but how much it is prepared to give away in the price remains to be seen – should it pay more for the assets because it is a better operator with better brands? That said, if ever there was a rationale for paying a “strategic premium”, surely this is it – and M&B's operational ability makes it easier to justify. Whitbread, the international player As for Whitbread, it has taken another step out of its brewing and pub-retailing heritage, toward a brave new world as an international leisure brand operator. Once Premier Travel Inn was an adjunct to its pubs. Now it is the central pillar of its future, and the pubs are an adjunct to PTI. If a pub does not, or cannot, have a lodge next to it, it is being sold. It has three brands at various stages of international development. PTI is to open in Dubai, while Costa is establishing a substantial presence in India. The global future of David Lloyd Leisure is more questionable. But it is a coherent strategy – and an understandable one given chief executive Alan Parker’s background as an international hotelier. As much as anyone Parker should understand the power of leveraging brands. Whitbread will also leverage other people’s brands. Its pub-restaurant brands Beefeater and Brewers Fayre will not be the only food and beverage solution for PTI going forward. It recently struck a deal with Paramount to open a Caffe Uno and it would be no surprise to see similar agreements with other casual dining operators. Despite question-marks over the group’s general performance, it is a sound strategy. Of course, an alternate view is that Parker is executing a break up strategy by stealth.