Subjects: Greene King’s managed ascendancy, pub market resurgence and alcohol and obesity
Authors: Paul Charity, Neil Morgan and Paul Chase
Greene King’s managed ascendancy by Paul Charity
The fortunes of companies, like empires, are either rising or falling. Nature abhors stasis. Companies, like football clubs, go through eras, with even those enjoying ascendancy always at risk of displacement. It was just 13 months ago, I floated the notion, once unimaginable, that Greene King, which had just opened its 1,000th managed pub, could one day run the UK’s largest managed pub division. I would have, of course, shook my head in disbelief to anyone who suggested it would happen in less than two years. But now, failing a fat and generous all-cash offer for Spirit from C&C Group, Greene King will be sitting atop a managed estate of 1,800 plus pubs by mid-2015, the latest date for its proposed takeover of Spirit to be complete.
This week, in a webcast to analysts, Greene King chief executive Rooney Anand was keen to stress how difficult it is to predict when acquisition opportunities will present themselves. Nevertheless, this year’s decision by Greene King to retire from the hunt for Orchid (allowing Mitchells & Butlers to buy the estate), whilst going on to deliver Spirit into the keep-net looks little short of super-smart.
The current Spirit acquisition scenario is laced with ironies. Let’s remember, C&C Group’s desire to acquire Spirit involves some of the executives who were involved in owning these pubs during Scottish & Newcastle Retail’s tenure. (They were sold to allow a focus on low margin brewing). It’s a vote in favour of vertical integration, so decisively rejected by Scottish & Newcastle before it was swallowed up by Heineken (although the UK brewer retained a pub management arm that later, in 2011, became a freehold-owning business – Star Pubs & Bars – when the estate came on the market). For Mitchells & Butlers, the Spirit estate is a merger opportunity that has been missed at least once. Who remembers the 2002 proposed merger-of-equals talks between M&B predecessor Bass and Scottish & Newcastle that reputedly fell apart over who would get particular jobs on the board? Punch’s audacious bid for M&B in 2008 might have been advisedly resisted (by the latter) with hindsight, but it would have united the Spirit estate with M&B’s managed pubs. Lastly, M&B’s acquisition of Orchid is a bottom-slice of the former S&N Retail’s estate (still good pubs but average Ebitda of £160,000 per managed pub compared to Spirit’s £200,000 per pub). In the context of sector consolidation, it’s broadly, in football terms, at least 4-1 to Suffolk United versus Birmingham City this year (almost 800 managed pubs set for the Greene King hopper compared to M&B’s 174-strong Orchid haul).
Anand stressed during Tuesday’s webcast that the fragmented pub sector is ripe for consolidation given that it was founded 500 years ago. Historically, the pub sector’s story has been cycles of consolidation and asset disposal as business models have passed in and out of favour. The last quarter century has seen the process speed up as assets have pinged between exiting players, new arrivals and slow-and-steadies like Greene King, Marston’s and the family brewers, with the Beer Orders the effective trigger.
There were hints, too, on Tuesday that Anand and Greene King still has ambitions to expand in the out-of-home foodservice market. He was quick to dismiss an analyst who suggested the Spirit deal runs counter to Greene King’s publicly articulated desire to grow or buy foodservice businesses that provide access to a broader day-part mix than pubs, trading weakly in the coffee shop hours, allow. That strategic move is simply part of Greene King’s medium term game plan.
But let’s reflect again on Greene King’s progress under Anand. At the start of his tenure, the company had just 551 managed sites, quickly lifted the same year to 801 by the acquisition of Laurel Pub Company’s neighbourhood division. The last eight years have seen an ever greater focus on its managed pubs as the main engine of company growth. Indeed, last year’s managed division turnover was around £130m more than the entire company turnover back in 2005. Tuesday’s presentation was also a reminder of how good a fit Spirit’s managed pubs make with Greene King’s sites – showing almost identical 25% turnover growth since 2010 and producing near-identical site Ebitda.
If I have one wish now it is that Greene King, in its soon-to-be elevated position as the UK’s leading managed pub company, lends its weight to the sector’s collective voice. The company has preferred its own path its recent years, opting to campaign on its chosen issues. Its decision to share the results of the Greene King’s Leisure Tracker is an example of a more collegiate and sector-minded approach of late. Calling on Greene King publicly to join our key retailing trade body, the Association of Licensed Multiple Retailers, would traditionally guarantee it never happening. But while it remains outside, it inevitably detracts from the collective lobbying strength that could be mustered. So, Rooney, you should allow the ALMR’s very able chief executive Kate Nicholls to make the case. What’s to lose?
Paul Charity is managing director of Propel Info
Pub market resurgence by Neil Morgan
Prior to the middle of last year, virtually all the market’s sales activity was individual pub disposals with the likes of Punch, Admiral, Greene King, Marston’s and Enterprise Inns selling thousands of pubs in order to pay down debt, or reshaping their estates as a reaction to the tough economic trading environment.
Fast forward to today and there are very few individual pub disposals as pub co’s have generally been successful in their churn disposal programmes and also reflecting in the change in the overall economic climate and trading environment. In addition, bank/administration led distressed asset sales have virtually been exhausted.
Alongside this we have seen the return of M&A activity at an unprecedented level. Initially private equity led the way acquiring asset backed tenanted pubs although latterly there has been a re-emergence in trade buyers looking to acquire other pub companies.
We are now seeing smaller portfolios of pubs coming to the market with competitive bidding from private equity and trade buyers. We are also witnessing buyers who hitherto have not been involved in the sector, looking to back experienced managed teams to acquire small to large portfolios of pubs as a platform for further acquisitions. Many of these buyers are adopting a longer term exit plan than the historic three to five year private equity work out.
So, what does this mean for pub values going forward?
Whereas 18 months ago buyers expected a discount acquiring groups of distressed pubs, we are now seeing smaller portfolios of tenanted/managed pubs attracting competitive bidding, resulting in 180 degree turnaround from where we were in 2012.
The last of the big portfolio deals to happen at the peak of the market in 2007, was Marston’s sale of 279 pubs to newly formed pub company Piccadilly, backed by private equity firm Aaim for a consideration of £82.5m. A price of over 11 times pub earnings. This compares to the Cerberus/Admiral transaction reported in January 2013 at less than half that multiple.
Whether we will see multiples get back to the 2007 levels is unlikely, however with the competitive bidding from the two seasoned portfolio buyers such as Hawthorn Leisure backed by Avenue Capital and Admiral Taverns, by Cerberus, alongside new entrants and trade buyers, multiples have certainly significantly improved and will continue to do so.
Christie + Co is aware of three portfolio disposal programs to be launched in the first quarter of 2015, which is certain to create a feeding frenzy, ultimately driving the multiples upwards. In 2007, according to the British Beer and Pub Association (BBPA), the breakdown in pub ownership consisted of 31,000 tenanted/leased owned pubs, 9,000 managed and 17,000 freehouses. Our own assessment of the current ownership landscape has seen a decline of 10,000 within the tenanted/lease model, no change in managed pubs and an increase in 3,000 pubs in private ownership.
Those houses which have transferred to the freehouse sector have received new investment reviving trading performance alongside entrepreneurial operators, resulting in a more vibrant and flexible pub offer. We have a more diverse pub sector with new multiple operators, reflected in the increase in the ALMR membership which has seen members grow by over 50% in the last two years. There are now over 300 multiple pub companies (with two pubs or more in the UK). These multiple pub co’s, many of which are quietly acquiring and expanding will no doubt benefit from increase in values and in turn will be rich pickings for the acquisitive buyers including the private equity fraternity.
In 2013 around 67% of the freehold pubs transacted by Christie + Co were retained by buyers for continued pub use. As the number of pub disposal programmes comes to an end, the quality which is being sold is improving, therefore we anticipate reporting in our 2015 Business Outlook publication a higher proportion staying as pubs, alongside an increase in prices being achieved.
At the time of writing this article, Propel has announced Greene King’s successful acquisition of the Spirit Group for around £773 million, which in the words of Rooney Anand, is a “transformation deal”. This purchase will no doubt accelerate their exit from tenanted pubs and It will be interesting to see how Marston’s and other Managed pub companies react given the limited number of managed house opportunities to grow through single site or new build acquisitions. All one can say is that prospects of owners of managed pubs are to see values increase in scarcity of supply and increase in demand.
Neil Morgan is director and national head of pubs at agent Christie + Co
Does drinking alcohol contribute to obesity by Paul Chase
Over the past week there has been a blizzard of comment from the usual anti-alcohol zealots about putting calorie information on the labels of alcoholic drinks, and on beer fonts in pubs. Alcohol Concern’s new chief executive Jackie Ballard even appeared on Channel 4 News to tell us that “alcohol isn’t nutritious” and that having a drink or two was like eating doughnuts. Even worse, a drink might disinhibit you to the point that you will eat the doughnuts as well! What a dreary world these people inhabit.
Let’s get a couple of facts straight: firstly, people don’t drink undiluted ethyl alcohol Jackie, they drink beverage alcohol like beer, which does indeed contain a whole range of nutritious ingredients. Beer contains high levels of most B vitamins, notably folic acid; it is one of the richest sources of silicate in the diet, which has been linked to a reduced risk of osteoporosis in moderate drinkers; it contains significant levels of soluble fibre and antioxidants, at least one of which – ferulic acid – is absorbed by the digestive system of the drinker.
It might seem obvious that since beverage alcohol contains calories, then it contributes to weight gain in the same way that doughnuts do – if the drinker imbibes to excess and doesn’t burn off the calories with exercise then he or she will put on weight. The first law of thermodynamics applies – consume more fuel than you burn and your body will store the excess. Actually, it’s not that simple. Most people think that the main sources of calories in beer and other beverage alcohol is carbohydrate. Wrong. It’s alcohol – and any alcoholic drink will deliver calories in proportion to its alcoholic strength. Extensive research shows that moderate drinking of beverage alcohol doesn’t correlate with weight gain and some studies show a small reduction in weight for women who drink.
The reason that alcohol doesn’t necessarily increase weight is unclear, but the research suggests that alcohol energy is not efficiently used. Alcohol also appears to increase metabolic rate significantly, thus causing more calories to be burned rather than stored in the body as fat. Other research has found that the consumption of sugar decreases as the consumption of alcohol increases. Whatever the reasons, the moderate consumption of alcohol is not correlated with weight gain and is sometimes associated with weight loss in women. The evidence for this is based on a large number of studies of thousands of people around the world. Some of these studies are very large indeed; one involved nearly 80,000 and another included 140,000 subjects.
The moderate consumption of alcohol is associated with better health and longer life than is either lifelong abstention from alcohol or abusing it. However, heavy drinking is associated with cirrhosis of the liver and other health problems. The key word is moderation. In relation to weight gain, the facts are that whilst beers, wines and distilled spirits all contain carbohydrates they contain no fats whatsoever.
Now I realise that Jackie Ballard is new in post and probably hasn’t had a chance to fully read herself in to her brief, but if she wants to know where these claims come from there are numerous studies she can look at. Here’s just five of them to get you started Jackie:
• Istvan, J., et al. The relationship between patterns of alcohol consumption and body weight, International Journal of Epidemiology, 1995, 24(3), 543-546.
• Mannisto, S., et al. Alcohol beverage drinking, diet and body mass index in a cross-national survey, European Journal of Clinical Nutrition, 1997, 151, 326-332.
• Prentice, A. M. Alcohol and obesity. International Journal of Obesity, 1995, 19(Suppl. 5), S44-S50.
• Colditz, G., et al. Alcohol intake in relation to diet and obesity in women and men. American Journal of Clinical Nutrition, 1991, 54, 49-55.
• Cordain, L., et al. Influence of moderate daily wine consumption upon body weight regulation and metabolism in healthy, free, living males.
And talking of people who are new in post leads me to the resignation of Norman Baker as Minister for Crime Prevention (including licensing) at the Home Office, and his replacement by fellow Lib Dem MP Lynne Featherstone. Norman Baker wasn’t in post long, but at least he knocked back the proposal to abolish the personal licence – so thanks Norman!
Lynne Featherstone comes with a formidable reputation of her own. She’s been very active on equality issues and was returned to represent the constituency of Hornsey and Wood Green, which she won at the third attempt from Barbara Roche in the 2005 general election. I don’t know her attitude to the issues surrounding our industry, but I hope that she will form her own opinions, particularly about health lobby claims. My best, unsolicited advice is: don’t follow the example of ex-Lib Dem MP Jackie Ballard by allowing yourself to be intellectually colonised by those around you.
Paul Chase is a director of CPL Training and a leading commentator on on-trade health and alcohol policy