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What The Butlers Saw
“standfirst”>With Mitchells & Butlers preparing to pounce on any break-aways from either the Spirit Group or Whitbread estates, rumours abound of further consolidation in the managed pub sector, says Simon Nixon
Britain is currently in the grip of a sharp consumer slowdown. That’s bad news for everyone in the drinks industry, but it’s particularly bad news for Britain’s managed pubs groups. Unlike tenanted pub groups such as Enterprise Inns and Punch Taverns, which derive the lion’s share of their revenues from lucrative rental agreements, managed pubs’ fortunes depend entirely on the number of pints pulled and meals served. If people decide to stay at home in the evenings rather than go out to dinner, it is the managed pubs groups that will suffer most.
Some of them are suffering already. In May, Whitbread, which owns 700 pubs plus the Beefeater restaurant chain, blamed the consumer slowdown for a 5% drop in first-half sales at its pub restaurants division. Days before, Spirit Group, the giant private-equity owned managed pubs group, reported what appeared to be a first-quarter fall in profits on half of its estate. The only large pub group to buck the trend was Mitchells & Butlers, the FTSE 100- listed owner of the Browns and All Bar One chains, which reported first quarter like-for-like sales up 5%.
In the City, bankers and analysts are following the fortunes of the industry with more than usual interest. The Square Mile is rife with rumours that both Whitbread and Spirit could soon be broken up. In June, a speculative story in London’s Evening Standard suggesting that various private equity groups were contemplating a bid for Whitbread caused the company’s share price to leap 10%. Meanwhile, Spirit Group has been forced to shelve plans for a stock market flotation later this year, following its poor firstquarter results. As a result, most City observers now reckon that Spirit’s owners would make more money by carving up the business and selling it.
Indeed, as the drinks business went to press, Punch Taverns is expected to make an offer of some £3bn for Spirits Group which would see more than half of Spirits 2,000 managed pubs converted to tenanted operations.
Spirit’s problems stem from all the time its management team has spent doing deals over the last 18 months. First, it paid £2.5bn for the giant Scottish & Newcastle pub estate. Since then, it has sold hundreds of pubs, arranged a giant bond deal and concluded two sale and leaseback agreements. This has allowed Spirit’s owners to take huge amounts of cash out of the business. But the company has paid the price in terms of operational performance.
Better off?
About a third of the estate has such low turnover that they are barely viable as managed pubs. Many of them would be better off as tenanted pubs. Spirit hangs on to them because they help provide the overall estate with economies of scale. But they would almost certainly be worth more to a specialist tenanted pub group (Punch perhaps) or a property investor such as Robert Tchenguiz, who specialises in pub investments. Meanwhile, there would be no shortage of buyers for its high-street pubs and pub restaurants.
Nobody doubts that further consolidation of the managed pubs business makes sense in theory. This is an industry with huge economies of scale, in terms of spreading overheads and centralising purchasing. And, by common consent, there are only about five or six thousand viable outlets in Britain for the managed pub model. At some stage, it makes sense that the three big managed pub groups should become two. But until a few weeks ago, that consolidation looked a long way off. Is it any nearer now? I
nhospitable
What of Whitbread? The hospitality group has been the subject of break-up rumours for years. The shares have long traded at a discount to the sum of the company’s parts, reflecting the company’s conglomerate structure. It incorporates such diverse businesses as budget hotels, high-street coffee shops and the David Lloyd Leisure chain. There’s no doubt that several private equity groups are eyeing up David Lloyd Leisure and there is talk that some might bid for the whole company. At the same time, many analysts speculate that Whitbread might take the lead and break itself up.
It is easy to see why the City has become so excited. In the last year, Whitbread has got a new chairman, chief executive and finance director. What’s more, the new board has shown it is prepared to take radical decisions. Earlier this year, it sold its Marriott Hotels business, which chief executive Alan Parker used to run until his promotion. And at its AGM in June, Parker announced a wide-ranging review of the company’s capital structure. He also gave himself a deadline of October to turn around the performance of the pub restaurant division. The feeling in the City is that anything and everything is currently possible with Whitbread.
The result is that the consolidation of the sector, which just six months ago still looked a long way off, now looks closer than ever. Should either Whitbread or Spirit be broken up, there would be no shortage of private equity bidders. And other smaller regional pub groups, such as Greene King and Wolverhampton & Dudley might bid for parts. But the big winner looks likely to be Mitchells & Butlers, which is poised to swoop on whatever becomes available.
Lucky escape
Certainly, Tim Clarke, M&B’s chief executive, has never made any secret of his ambition to add to the company’s 2,000-plus estate. Eighteen months ago, he was outbid by the rival Spirit Group in the auction for Scottish & Newcastle’s giant pub estate. That now looks to have been a lucky escape. It left Clarke free to focus on driving an impressive improvement in operating performance and return truckloads of cash to shareholders. That has won him a loyal fan club in the City, which means he should have little trouble getting the backing for a deal.
“May you live in interesting times” is an old Chinese curse. The consumer downturn certainly makes these interesting times for Britain’s managed pub groups. But for M&B they could yet turn out to be a blessing.