Meet the Landlord – City Comment

Through an aggressive series of property deals, Robert Tchenguiz has quickly amassed a significant pub portfolio. Mitchells & Butlers could be the next in line, says Joanne Hart

Pubs and Robert Tchenguiz seem inextricably linked. During the last few years, the Iranian-born entrepreneur has kept City watchers busy with a series of acquisitions and attempted takeovers in the industry.

It all began six years ago, when Rotch Property Group, the company he owns with his brother Vincent, became involved in a consortium that bought Pubmaster, the pub group that was later sold to Punch Taverns.
Four years later, Tchenguiz, 44, bought the Laurel Pub Company, owner of the Hogshead pub brand. He then created The Globe Pub Company to run his pub interests.

In 2005, he added Yates Group, merging it with Laurel, which subsequently bought SFI Group, operator of the Slug & Lettuce, Litten Tree, Bar Med and Fiesta Havana chains.

Tchenguiz has also bought 364 managed pubs from Scottish & Newcastle Breweries and converted the core estate to tenancies. The Globe Pub Company now has more than 450 leased pubs, which are supplied by Scottish & Newcastle.
Further testament to Tchenguiz’s interest in the sector can be seen from the unsuccessful bid he made for managed pub operator Spirit Group and the fact that he has been actively considering an approach for Mitchells & Butlers, owner of the All Bar One, Harvester and O’Neill’s chains.

Not that pubs are Tchenguiz’s only interest. Through Rotch he has a portfolio of 800 buildings, worth more than £5 billion, including Shell-Mex House on the River Thames in London. Last year, Tchenguiz was part of a consortium that paid £1.1 billion for supermarket group Somerfield. He even tried to buy the chain of Selfridges department stores three years ago.
So who is this deal-maker, and what is attracting him to the UK’s on-trade business? Does he have a master plan for the pub sector? And what effect is he having on the industry?

The last question is perhaps the easiest to answer. Ian Payne, Laurel’s executive chairman, says,  “He has had a dramatic effect on the industry. If you look at what he has done in the last 18 months or so, he’s gone from zero in managed pubs to having a large company with 405 pubs, and he’s also an important player on the tenanted side.

Great expectations
“He’s very ambitious. We’ve made no bones whatsoever about the fact that we want to expand Laurel and we would expect to look at anything that comes up.”

The key to Tchenguiz’s modus operandi is property. Properties can be used as security to borrow money against future rental income, and Tchenguiz has proved adept at that. Many of his purchases are heavily financed by borrowings and followed by leaseback deals.

However, Payne says that fears that Tchenguiz would turn out to be an asset-stripper have proved unfounded. “Of course he’s a property developer,” he says. “What he’s got is an ability to finance pub transactions that enables him to raise more debt than other operators. He uses the skills he has as a property developer to borrow money, and the City is always sceptical of highly indebted deals. But pubs do have high cash flow and they are cyclical.”

One leisure-industry banker who knows Tchenguiz well says, “He’s been at the forefront of two movements. One is the growth of the tenancy model and financing that by securing freehold assets. The second, more recently, has been the development of management structures of pub groups into property companies that own the assets and separate operating companies that run them.

“He has been at the vanguard of the managed pub set-up, which has become a big part of the pub industry. He is interested in property plays and ‘alternative use’ values, such as pubs on potential development sites.”

“He is a property man first and foremost and a pub man second,” adds a pub group executive. “That’s what has sparked his investments. By buying property, he can leverage the business a lot more. It’s a very clever financial model. He might buy a pub worth £500,000 and rent it out for £100,000 a year to his operating company. Immediately, he has turned that property into something worth £1.6 million because of the rent paid on it.”

“What has always amazed me is that he works in such a small team, relying heavily on just two other executives, Aaron Brown and Tim Smalley. He has really got his hands on so many things. He is very entrepreneurial. At board meetings he is always onto the next item on the agenda before everyone else. He runs the business at a very fast pace.”

Number crunching
Payne agrees. “He has the best head for figures of anyone I have ever worked with,” he says. “He has an amazing ability with numbers, both in terms of retaining them and calculating them. He can remember numbers to an amazing extent. He is also very creative in building a deal and putting it together, but once he has done a transaction, he lets the management get on with it and is very supportive.”

Industry experts also pay tribute to Tchenguiz’s vision. “What he’s done is a very interesting ploy because he’s concentrating investment on the high street at a time when retail spending is down. Other people have been put off investing in pubs because of licensing changes and the smoking ban, but he has gone and done it,” says one pub executive.

Tchenguiz is still deciding whether to bid for Mitchells & Butlers, and he has also been looking at a possible bid for nightclub group Luminar through a vehicle called Mintgate Investments. Few in the City expect a Mitchells bid to materialise, but Tchenguiz clearly has an appetite for another big deal.

As Mark Brumby, drinks industry analyst at stockbroker Oriel Securities, says, “It would be wrong to underestimate a man who has just finished a credible second in the bidding for a 2,000-strong managed pub chain [Spirit], when he turns around and makes clear his interest in another 2,000-strong managed pub chain.”

The message is certain: Robert Tchenguiz is not finished with the pub business yet.  db May 2006