Spirit Seeks A Mixer

The frenetic deal-making seen in the last five years of the pub sector shows no sign of abating – but will Karen Jones get an exit the money men like? By Matt Guarente

I have a stock reaction to highly Byzantine, willfully obscure or even just plain old convoluted situations. I say: “Who’s on first?”

The fact that I’m a fan of baseball, and of Abbott & Costello, will give a clue to some readers what I’m on about; it’s the sketch in which the two jokers come to loggerheads with Abbott as the baseball team manager and Costello the head of the sports department who wants the names of the players. Abbott says: Who’s on first, What’s on second, I Don’t Know’s on third. Costello: That’s what I wanna find out. A: I say Who’s on first, What’s on second, I Don’t Know’s on third. C: You know the fellows’ names? A: Certainly! C: Well then who’s on first? A: Yes! C: I mean the fellow’s name! A: Who! C: The guy on first! A: Who! C: The first baseman! A: Who! C: The guy playing first! A: Who is on first! C: Now whaddya askin’ me for?

Who, of course, is the name of the player. Which brings us neatly, if rather circuitously, to the latest instalment of the slice ‘n’ dice game known as the pub sector. Who are the players? Everyone. Who’s on the block? Everyone. Pubs are the current corporate version of pass-theparcel, with a twist – everyone gets a go at unwrapping the last layer of branding and sticking their own on it.

And what a repackaging. At the last count, Spirit Group had 20 different names under which it grouped its pubs.

That number decreased slightly at the end of September when the well-trailed sale of Spirit’s high street bar and pub operation to Alchemy was inked. The deal, involving 177 outlets finally going at a price equivalent of £1m each, took seven months to find a buyer. But Spirit is privately owned with money from private equity backers; exactly what value does Alchemy, another private equity house, see in the estate that the current owners don’t?

Pubs are going through a turgid time – nothing new there. It’s been a struggle since the 1970s to make any decent money from a standard boozer, what with punitive duties on beer, shrinking retail margins, and now legislative pressure from anti-smoking to draconian measures designed to curb binge drinking which will actually simply ring a death knell for city centres. So we have theme pubs. Food pubs. Café bars. Destination pubs. And everyone seems to see their own little slice of Shangri La in each; entrepreneur Robert Tchenguiz picked up 360 underperforming Spirit pubs earlier this year for a similar kind of per-unit cost that Alchemy has just paid. Jon Moulton, the man whose company is named after the process of turning dross into gold, now owns bar sites across the country but which will likely be under most pressure to go smoke-free – something drinks analysts say is a sure-fire way to dent operating profits.

Tip off

At this point, and rather against the journalistic convention of telling a story with the ending first and instead burying the lead way down here, I’d like to break some news to Karen Jones, Spirit’s chief executive – Punch has been looking for pubs all along! And if she’d tipped them off about the 177 Alchemy has just snapped up, she’d be in line for a finder’s fee north of £400,000. At least that’s what it says on the Punch website. “Punch Taverns are (they mean ‘is’ – companies are singular entities) always on the lookout for new freehold sites for sale” says the site helpfully. “At Punch, we purchase properties almost daily and have an industry leading reputation for a fast nononsense response to retailers who wish to sell their pub.” But there is one sticky caveat in this full-on approach: they offer you a price, and if you don’t like it, too bad. They move on, ever keen to add to their 8,200- strong portfolio.

The simple fact for Spirit is this; the Tchenguiz and Alchemy deals were less than 20% of the total estate, and it has been no deep secret that the rest of the group is being eyed up by Punch and by Mitchells & Butlers, or that a sale is in the offing by way of an IPO.

Like Punch’s attitude to pub owners, price could be the issue. The owners of Spirit are Merrill Lynch plus the venture cap houses CVC, Blackstone and Texas Pacific; to carry on my baseball fixation, these guys only play hardball. Spirit CEO Jones has pushed the company to the point where it might not get much more in terms of valuation, by doubling the size of the estate following its spinoff from Punch and turning around its operational effectiveness.

If we stick a rough valuation of a million pounds for every pub in the estate, then we might come up with a figure of around £2bn for Spirit, though The Times has mentioned £3bn. £2bn is the value of the refinanced debt the company arranged last year. It managed to pull in £500m with a sale and leaseback of 220 of its pubs in March 2004, which helped pay down some debt, and another £536m when it offloaded the Premier Lodge hotels business in July of that year. So in total just over £1bn in asset sales have been through the books in the last 16 months or so, including the Tchenguiz and Alchemy deals. And still there are denials that the company’s on the block?

Asset-grab

The problem for Jones, and her abacus-wielding American financiers, is that neither of the likely buyers, Punch or M&B, seem crazy-keen to buy. Having watched the pubs eventually unloaded to Alchemy swing in the breeze for seven months, and having vast estates of their own to manage, adding another couple of thousand might not be their first priority.

Insiders close to the companies speculate that it will be an asset-grab; that eventually, the most likely scenario is that M&B and Punch get together and decide what best fits with each of them, and sell off the rump neither wants. Insiders also posit that regulatory issues shouldn’t be an issue – neither is anywhere near the 20% market share by ownership that usually excites the attentions of the Competition Commission. But despite M&B’s recent admission that it’s interested in the fray, sources tell us that certainly Punch – and perhaps M&B – are relaxed about the possibility of buying the estate, but that few tears will be spilled if it goes to an IPO. So the question for Spirit isn’t who’s on first – it’s who’s prepared to step up.