Punch Taverns’, is the House of Straw about to go up in smoke.

By | October 29, 2013

Punch Taverns’ big headache and a House of Straw

With a crippling debt hangover, could closing time be approaching for the UK’s second largest pub chain?

( With many thanks to Andrew Saunders of MT Management)

Formative years

Punch Taverns opened its doors in 1997, a time before the smoking ban when street-corner boozers were still two a penny. Big brewers were disposing of their tied pubs, so Hugh Osmond (former boss of Pizza Express) teamed up with Cafe Rouge co-founder Roger Myers to create a vehicle to buy them. First across the bar was the Bass pub estate in 1997, followed two years later by the £3bn acquisition of Allied Domecq’s pubs.

After that deal, Punch spun out its managed pubs into a separate business, the Spirit Group, and then floated itself on the LSE.

A series of complex leveraged takeovers followed, often pitching Punch against arch-rivals the Tchenguiz brothers, including the buyback of Spirit in 2005 for £2.68bn.

Punch became the UK’s largest pub landlord, with 8,000 boozers.

Recent history

When the crash hit in 2008, punters abandoned the local, instead drowning their sorrows at home with cheap supermarket booze. Punch’s debt-fuelled model left it massively exposed – in 2009, an 8% fall in revenues sent losses spiralling an eyewatering 500% to £400m.

In a desperate attempt to salvage some value for shareholders, Punch’s best outlets were hived off as the Spirit Pub Company in 2011, leaving Punch with the rump of the estate and vast debts. It began a huge sell-off to pay them down, but last autumn shares sunk to below 8p, 97% down on their 2007 peak.

Who’s the boss?

It’s all changed since the glory days. Current landlord-in-chief is executive chairman Stephen Billingham, whose most pressing task is restructuring Punch’s two huge loans. If he can’t do that soon, analysts reckon Punch may not survive.

The secret formula

Leverage. Back in the boom years there was no more readily securitisable asset than a juicy property portfolio. By borrowing more and more against the value of its pubs, Punch grew very big very quickly, but its debts peaked at over £4.5bn. However, the licensed trade has changed: now success is about good food and a memorable experience, but Punch can’t afford to invest in enhancing its estate.

Don’t mention

Loan covenants. Punch’s debts now stand at £2.3bn – 25 times its market cap or seven times total shareholder equity. A deal to renegotiate their terms has been on the table for six months but lenders have yet to sign up. Perhaps they need a bit of Dutch courage?

Vital statistics

Revenues: £458m Pre-tax profit: £49m Debt: £2.3bn No. of pubs: 4,096

Note: For years freehold pub valuations were based on Turnover or Bricks and Mortar, which gave a realistic tradable valuation to pubs and similar aligned businesses.

With the advent of the  Pub Co, Punch, Enterprise etc. and so called leases, they applied normal commercial property freehold valuations for leased properties based on an investment rental value, by over valuing the rent and ignoring viability this enabled further funding for expansion.

The reality now is that Pub Co rents in the main are unsustainable against viability, the freehold values have crashed and Pub Co’s estates (Assets) are worth very little in comparative terms.

I think Fire Sale is probably appropriate.

One thought on “Punch Taverns’, is the House of Straw about to go up in smoke.

  1. Ian

    Excellent article and a perfect summary of what has been another great shareholder swindle.
    It’s the small shareholders who suffer – the guys at the top and the deal-makers make sure they get their fill.

    Reply

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