Thoughts on the MRO and Pub Co’s

By | November 22, 2015

Bad Beer For Export

Thoughts on the MRO and Pub Co’s (Barrel-dregs)

Punch have a new CEO, who may have a fresh approach to the pending Legislation and MRO.

Certain Pub Co’s as we all know have a mountain of debt, generated by a number of self inflicted reasons.

The sharp guys, who created these Companies have walked away with millions, leaving companies teetering, with twitchy staff and lessees wondering what will happen next, the shares are now a fraction of their dizzy heights of bygone days.

The obvious thing has been to reduce the size of the estate, in some cases exposing a serious fall in the book valuation, raising questions that cannot be answered by the management at the time, all history

Punch now have a much reduced estate, by selling off tranches of pubs to various organisations, in some cases the prime sites, a great shame, today is today and yesterday is history.

The sale of further tranches of pubs to New River Retail by major pub Co’s for possible conversion to retail outlets, at whatever price, has to be a short term expedient to raise cash.

Surely with the financial contacts that these Pub Co’s have, it would be far better to do a deal with a large mortgage provider at very advantageous terms to any lessees who would like to buy or has a viable pub. At the same time, whilst the advantageous mortgage deal is in place, they buy all their stock at a better discount than they could achieve as a sole operator, through the Pub Co’s nominated suppliers.

We know as  substantial multiple operators, their discount is substantially greater than a sole operator can achieve.

The lessees deals direct with the suppliers and have the usual monthly trading credit terms, improving their cash flow.

The Pub Co get the surplus discount paid to them the month following, and do absolutely nothing.

In the event of a pub failing, the Pub Co get first refusal to take it back to let or resell it again.

Assuming that the mortgage deal is highly competitive and the supply deal also, with annual upgrades, the ex lessee has no reason to refinance to get away from the tie.

A similar deal can also operate with the MRO, in terms of the supply deal.

The one serious advantage with the MRO deal is that, provided the Pub Co does not get short term greedy by inflating the rent, leases will have serious value and become an asset rather than a liability.

There will be failures, in stead of costing £50K, the Pub Co takes back the lease and re lets, substantially recovering their costs with a profit.

The idea that rents will increase with the lessees taking the MRO, to compensate for the Pub Co’s loss of the whole discount, is never disclosed.

Having owned many freehouses, the discount profitability will only make a very small percentage increase on the overall net profitability, purely because there could be a very slight levelling down in wet sale prices across urban areas.

If leases have serious value, lessees will invest in their businesses, which the majority do not, since any serious investment is perceived as going to the Pub Co, this culture has to change.

By adopting this method, a massive saving in Pub Co admin  costs, BDM’s would become business advisers, which many are considered to be debt collectors.

The discount system works very well, having used it for a number of years with our leased pubs, our overheads were minimal and we were able to set up competitive deals with a range of suppliers and the lessees were delighted.

One Pub Co is talking about converting a large part of its estate to managed houses, using the Landlord and Tenant Act to claim the property back at the end of the lease.

Or offering five year leases which breaks the conditions of the existing lease and gets them out of paying statutory compensation, if they or their predecessors have served a minimum of seven years collectively of the lease, the compensation is based on the rateable value and doubles if they have served fourteen years.

It would appear that approaches have been made seeking offers for twenty year leases with the MRO, at what cost????

The industry have to work together and present a united front to combat legislation that has destroyed the core businesses of many pubs, the new legislation and the MRO needs combined positive thinking, with the benefits of long term trading, not short term cash grabbing and licensees, however good as totally expendable.

Business is flat for many reasons and unlikely to change a number of years, it has always been cyclical, sadly this is going to be a long cycle.

Potboy (Midlands)

The views expressed are not necessarily the editors and www.buyingapub.com accepts no responsibility for them, we do try to avoid offensive or litigious statements being made. They are written by concerned professionals in the industry who feel that these issues should be raised to ensure that all licensees are made fully aware of many hidden pitfalls.

 

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