Spirited performance

The Spirit Group has always been something of an enigma. While its brands, such as Bar Room Bar and Q's have become well known, the group itself is by no means a household name in the way that Wetherspoons is. Then, last year, the group seemed to spring out of nowhere when its £2.5bn takeover of Scottish & Newcastle's retail division, which created Europe's largest pub, restaurant and budget hotel operator, catapulted it into the media spotlight. Except it didn't. While many companies would have basked in the glory, the group has shunned the limelight. And it has remained quiet ever since. Its secrecy would suggest it has something to hide. In fairness, the Spirit Group is a private company, and some of its taciturnity could be attributed to the company sorting through it affairs following the acquisition of S&N Retail, which more than doubled its portfolio. It is now gearing up to sell some of these units as well as auctioning off the Premier Lodge chain, in what is widely thought to be an effort to get its house in order ahead of a flotation. So with all this activity, what does the market really think of the Spirit Group? Those in the know recognised that it has worked away in the background. "They are letting their results speak for themselves," says Bill Graham, a director at Fleurets, which carried out due diligence on the S&N units. "They have been through some very aggressive bidding with the S&N acquisition, and it was against some very severe competition," he adds. Nick Weir, partner at Shelley Sandzer, says: "They have been quietly going about their business and they don't shout about it. "They have been getting their house in order and now they are a powerhouse." Formerly the retail division of Punch Taverns, the Spirit Group was spun-off in 2002. It is backed by US-based investment firms Texas Pacific Group, Blackstone Group and CVC Capital. It now boasts 2,400 pubs - greatly boosted through the addition of S&N's 1,400-strong pub division - as well as substantial hotel and restaurant holdings. Almost a third of the Spirit Group's outlets are based in the South East, but it has a smattering of units nationwide. Its results also stand up to scrutiny. Greg Feehley, leisure analyst at Altium Securities, estimates that the Spirit Group achieves an annual run rate/EBITDA of around £450m from its stable of nearly 2,500 managed pubs. Much of its profitability stems from its strategy of keeping managed pubs rather than tenanted ones. In contrast, Feehley points to Punch Taverns' 9,300 tenanted pubs, which, despite being nearly four times the size, only achieves a roughly equal run rate/EBITDA of £500m. Its relatively new chief executive is Karen Jones is already gaining an impressive reputation. Jones has been labelled everything from the "Queen of Pubs" to the female Phillip Green. As Trevor Shelley, director at Shelley Sandzer, says: "Karen Jones is the star of the city, she has no ego and works hard and it's rare to find people like that." Jones, now in her mid-40s, made her mark building up the Café Rouge chain of restaurants. On its sale to Whitbread in 1996, Jones joined Punch's Hugh Osmond - founder of Pizza Express - at its unbranded managed pub estate. Raised eyebrows Her appointment did however, raise a few eyebrows. Some observers felt she had taken a huge leap forward. "She effectively got five promotions in one go, she had done nothing on that scale before," says one. But she has since proved any skeptics wrong, providing what one commentator called "high profit margins and impressive management". Jones' experience in the food industry has become the Spirit Group's winning formula, with the company constantly winning accolades for its food offering in pubs. "They are not like a lot of operators which are looking to get margins off the alcohol, they are getting value out of their food," says Shelley Sandzer's Weir. The market has praised its brands from its roadside Whacky Warehouses, which offer family feasts, play barns and Sega Dreamcast machines to its cool and trendy Bar Room Bars, which feature wood-fired pizza stoves and monthly art exhibitions. But Jones' toughest test is yet to come. The Spirit Group's spring clean is widely seen as a precursor to flotation. Although the Spirit Group once more remains tight-lipped about the prospect of an initial public offer (IPO), Feehley points to the competition. "There are four major players in division one of the UK's pub sector, and three are quoted and one isn't." Feehley believes that the group could float within the next 12 months. "There is no big rush and it could possibly be sooner once Premium Lodge is out of the way." Using a crude calculation based on enterprise value and EBITDA, Feehley places the market capitalisation of the Spirit Group at around £3bn. He stresses, however, that this is not an indication of how much the Spirit Group could raise at IPO and much of this money would, in all likelihood, go towards paying off debt. The amount of cash the Spirit Group could raise from an IPO is also being hotly debated. A lot will depend on the capital structure. The Spirit Group could chose to adopt a straight financing deal, or, if it takes a similar route to Mitchell & Butlers, securitisation of the business' remaining assets and returning cash to shareholders. But is it a good time to float? With talk in the industry of other players, such as The Living Room, coming to market, has investors' appetite to snap up shares in the beleagured leisure industry returned? The market seems to think so. The FTSE All-Share index has risen by nearly a third over the past 12 months, and Feehley says that, against this, the leisure sector has risen by 61%. "There is a window of opportunity this year that was not there last year," he says. "Whether it is celebrating or commiserating, people are still having a drink," he says. The Spirit Group's portfolio has helped its resilience. Fleurets' Graham believes much of the talk of saturation has been targeted at the high street. "Surburban and community pubs are doing as well as ever and the addition of S&N to Spirit's estate means it is not particularly exposed to the high street." The deal left Spirit with 57% of its units in suburbia and just over a tenth in rural locations. Fine tuning Fine tuning of the pub holdings will continue. The Spirit Group is preparing to seek bids for the sale and leaseback of up to 300 pubs nationwide worth up to £600m. With a covenant like the Spirit Group, most leisure agents seem to agree the sale should be easy. The company has now been through its property assets with a fine-toothed comb, says Weir. "You can bet your life it will be a good package, which will be snapped up quickly by private equity funds." The company is reportedly lining up bids for its 130-strong chain of Premier Lodge hotels, which it acquired with the S&N deal. Memoranda for the 8,936 bedroom business are currently in the post and interest has been reported from Permira, the private equity firm which owns Travelodge, as well as rival Travel Inns' owner, Whitbread. With the dust settling on a multi-billion pound deal, two auctions in the pipeline and a flotation on the cards, the Spirit Group has its work cut out for the next year. The market appears to be waiting with bated breath for its flotation, which will involve major changes for the company - not least learning to cope with its shyness.