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Sun 3rd Nov 2013 - Trade buyers and private equity mull Orchid acquisition
Trade buyers and private equity mull Orchid acquisition: A range of private equity and trade buyers are mulling bids for Orchid Pub Company. The Sunday Times has this morning reported that Spirit Pub Company is among the trade buyers considering a bid for the company, with indicative offers due shortly. Industry sources suggest the level of interest from financial buyers means that current management could receive backing to continue to grow the business. Of particular interest for financial buyers is the roll-out potential of Orchid’s Pizza Kitchen Bar concept that deftly broadens the traditional wet-led offer by adding an accessible pizza offer. Orchid operates an estate of 235 pubs, with 190 plus freeholds and has a current Ebitda run rate around £30m, suggesting the business may be worth between £250m and £300m. The interest from Spirit in buying is a surprise given earlier indications of its desire to expand by buying pubs individually or in small groups. But industry analysts point out that the Orchid estate would be an excellent fit with the Spirit brand portfolio, not least given Orchid’s very high food sales – 40% of overall turnover. Last month, Spirit told City analysts that it will now start buying new freehold pubs to add to its Fayre & Square and Flaming Grill brands as it aims to expand to 1,500 pubs. It also launched plans to reschedule debt in a move that would free up cash to acquire pubs. The company said it would begin buying pubs in its second quarter – at the end of this year – and is looking for a 20% return on its investments. Spirit declined to give precise numbers for acquisitions but its target size is around 270 pubs bigger than its current size. A move to acquire Orchid, with its 232 pubs, would take Spirit very close to it target size in one leap. The move to start to buy pubs comes because Spirit feels that it had moved beyond the “stabilisation” stage for its estate and into the “optimisation” part of its journey. Chief executive Mike Tye said that there is now “an opportunity to acquire pubs” to “leverage fixed costs, brand and skills”, with each of its brands capable of growing to 200 sites without risk of cannibalisation. Stonegate and Greene King are other companies that The Sunday Times claims is interested in buying Orchid. In September, Orchid reported EBITDA of £29.3m on turnover of £178.8m in 2012. The company saw average weekly sales rise to £14,100 per pub from £13,900 the year before. Like-for-like sales grew 3% in the first seven months of 2013, which is out-performing the Coffer Peach Tracker. The company saw owner Deutsche Bank provide £20m to invest in the estate in 2012. Chief executive Rufus Hall said: “We commenced an investment programme in the fourth quarter of 2012, completing 12 investments in the year. Given the early success of investments, we were able to accelerate the programme and have to date now completed a total of 43 investment schemes, with current levels of return on investment (ROI) running at between 25% and 30%. Group EBITDA in 2012 – after rents paid on leasehold properties within the pub estate – was £29.3m at house level. We expect this figure to materially grow in the current year and on a current run-rate basis, our EBITDA figure is above £30m. Our central overhead costs, including the Orchid support centre in St Albans, were £8.6m, which at £35,000 per pub, compares favourably with our peer group and means that we are one of the lowest cost producers in the UK managed pub arena. Our strategy is very straightforward: by focusing on ‘pubs and people’, we aim not to be the biggest managed pub business in the UK (we are the seventh largest) but to be the best, operating high-quality pubs with a good balance of food and drink sales. Food now accounts for more than 40% of our sales mix, up from 28% in 2006, reflecting our focus on informal food and drink occasions, and recognising changing customer trends.”

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