At the end of December 2015, Greene King reported that it was shipping 50,000 cases of India pale ale to China following a surge in demand after President Xi Jinping drank a pint of the beer with the then Prime Minister David Cameron on his state visit to the UK. The Suffolk brewer and pub operator said demand for IPA from China had increased by 1,600% after Xi’s visit to Greene King’s pub The Plough at Cadsden in October. Twelve months on, Chinese investor, SinoFortune Investment, which was attracted to the pub following the President’s visit, acquired the pub with plans to expand the iconic British concept overseas. Three years on, Hong Kong’s richest family is to buy the 220-year-old pub and beer company for £2.7bn (£4.6bn including debt), or £1m for every one of the company’s 2,700 pubs, restaurants and hotels. Of course that only tells part of the story.
Rewinding to the end of 2016, the deal for the Plough at Cadsden, wasn’t the only pub transaction at that time involving Greene King and a Chinese-owned company. CKA Group, which is owned by Li Ka-shing, a 91-year-old multibillionaire, quietly – compared to the deal for The Plough – acquired 162 pubs let to Greene King from US private equity firm Cerberus Capital Management, in deal valued at circa £400m. CKA, which already has stakes in UK brands including Superdrug and telecoms firm Three, has already had its interest in the UK’s pub sector piqued and it is believed has been looking for an opportunity to make a bigger play in the sector ever since, with some suggestions it had previously run the rule over the Ei Group.
The timing of the deal, which I understand has been bubbling under for over three months, can be seen as cute, especially with the wider issues being faced by both Britain (Brexit uncertainties) and China (pro-democracy protests in Hong Kong). For the Hong Kong-based CKA, the deal for Greene King might be seen in some quarters as “getting more cash out of the country”. However, it is already one of the biggest overseas investor in the UK, and must be constantly looking at ways to diversify its property portfolio further. Depressed share prices combined with a depressed currency are providing those with the benefit of a long-term outlook unexpected opportunities to acquire established asset backed UK businesses. As one analyst put it: “the deal appears to demonstrate an appetite to deploy a very large volume of capital into a company with a significant holding of UK real estate, despite the ongoing uncertainty surrounding Brexit.”
As I have said many times before, the UK’s largest pub groups have been undervalued by the City for too long. CKA’s bid for Greene King is 91% of the pub company’s all-time price high of 930p (December 2015) and 850p is broadly Net Asset Value, as was Stonegate’s recent bid for Ei Group. Unlike that proposed deal, it is hard to see anyone else coming in to muddy the waters – £2.7bn is a big ticket for the equity, a 51% premium on the sharp ice at the close of last week.
So what are CKA getting for its money? It gets a fairly new management team led by new chief executive Nick Mackenzie, a business where underlying performance is improving and a company that arguably has the best cash flows of all the pub groups. The company has also stabilised its brewery profits, and the cash flows, as with those of Pub Partners, have been recycled into the retail space and/or used to pay the dividend. There will of course be plenty for Mackenzie and his team to tweak, but the need for a major strategic review is not there. There remains significant benefits to come from the Spirit deal. His key thing, in the short to medium term, is to ensure that these are delivered. It sounds like the new owners will back him to do that.
Reading the statement, CKA wants to keep Greene King whole, so it will be a case of business as usual for the time being. Freeholds is where the focus will be. The market has long waited for Greene King to shed some of its leased estate but you would imagine CKA will look to assess that part of its business first before any packages came on the market. Of course CKA could look at further consolidation opportunities. George Colin Magnus, chairman designate of CK Bidco, which is the CK Asset vehicle that has agreed to acquire Greene King, said: “CKA’s strategy is to look for businesses with stable and resilient characteristics and strong cash flow-generating capabilities. The UK pub and brewing sector shares these characteristics and we believe this sector will continue to be an important part of British culture and the eating and drinking out market in the long run. Greene King, being a leading integrated pub retailer and brewer with strong real estate backing, is well positioned to capture the opportunities that lie ahead.”
Already this year Fuller’s has sold its brewing arm to Asahi; Ei Group has agreed to be taken over by Stonegate; and the Danish billionaire family that controls the Lego toy firm, with other investors, has agreed to pay £4.8bn for Merlin. Bids for the UK’s leading, large hospitality and leisure groups are becoming almost a monthly occurrence and there will surely be more to come. The premium being paid for Greene King means the multiple is a heady 10.0x Ebitda and one that would be hard to turn down for other asset backed pub companies. With freeholds being the strongest pull for overseas investors, Mitchells & Butlers obviously comes under the main focus but any suitor would have deal with awkward shareholders and full business securitisation. Marston’s seems like the obvious next target and you wonder whether both Stonegate and CKA already looked in its direction, especially with its asset portfolio and significant, and growing, distribution arm. Is it time to dust off those Greene King/Marston’s merger theses again? Marston’s, M&B and JDW all saw their shares uptick on the Greene King news, which is again a positive for a sector enjoying its moment in the sun as its casual dining cousins continue to suffer. (A penny for the thoughts of Mackenzie’s predecessor Rooney Anand, the chairman of the Casual Dining Group, which arguably could do with its own CKA Group coming along).
Speaking of its own pub investment in December 2016, SinoFortune Investment, which acquired the Plough in Cadsdenwith plans to expand the iconic British concept across China, said: “The English pub concept is growing very fast in China, and it’s the best way culturally to link people from different countries and build friendships.” It never did take off as they imagined it would, indeed one local visitor to the Plough told TripAdvisor that the pub had lost its “mojo” under the new ownership. You’d expect CKA and Greene King not to make the same mistake.