It is 75 years since licensed property agents and brokers Christie & Co negotiated their first hotel deal. To mark the long-time Catey sponsor's anniversary, five of the directors gathered to discuss how ownership of UK pubs, restaurants and hotels has changed over the years. Ben Walker reports.
Eating, drinking, and sleeping will never go out of style. The fundamental nature of hospitality has changed little in the last 750 - let alone 75 years. From medieval monk to modern man, if you're after a pint and a room at the inn then there is still only one place to go.
"The pub remains a vital amenity. Cask ale is making a comeback and the pub is the hub," comments Neil Morgan, one of the five Christie & Co directors who gathered to discuss the landmark events that have shaped UK hospitality property ownership over the last 75 years.
The profile of the typical pub operator has not changed much either. "A pub is a home and income proposition. The majority of private pub buyers release equity from their houses and this is still the case," says Simon Hughes, UK managing director. Experienced local operators already with two or three pubs are currently buying many of the latest Punch, Enterprise and Admiral disposals.
Some differences, however, underline the prevailing tough economic climate. Even compared to the 1990s recession there are fewer first-time buyers due to current lending restrictions, and it is now more common for one half of a couple to have a full-time job outside the pub.
THE BEER ORDERS
Pub ownership has inevitably been shaped by political and economic changes. The 1990 Monopolies and Mergers Commisision report - commonly known as the Beer Orders - and the easy access to cheap finance before the credit crunch are two of the biggest forces to have affected the structure of the UK pub industry.
In terms of size, the UK pub industry reached a peak of approximately 78,500 properties before the Beer Orders, which aimed to break-up the dominance of the major breweries who were perceived to be restricting choice and controlling prices. It recommended that no major beer producer could own more than 2,000 pubs and led to a flood of pubs coming to market at knock-down prices.
As the major breweries of the day - Bass, Allied, Whitbread, Grand Met, Courage, and Scottish & Newcastle - sold off thousands of their pubs, some, such as Bass, chose to exit the pub sector altogether. Others, like Whitbread, decided to ditch their breweries. What the Conservative government of the time did not anticipate, it seems, is who would buy the pubs the breweries were forced to sell off.
"The aim was to break up vertical integration [of supplier and retailer] but the Beer Orders ended up having the opposite effect. In the years that followed, regional brewers were pushed to the sidelines because they couldn't compete with the prices that others were paying," comments international managing director Chris Day.
Nomura rapidly became one of the largest owners of UK pubs and Christie & Co worked closely with the Japanese bank on a number of deals. Chairman David Rugg remembers the emergence of securitisation. "Financier Guy Hands, who headed Nomura's principle finance unit, realised that you could apply securitisation to pubs because of their relatively stable income, so you could forward-sell the capital value of the income stream for perhaps 20 or 30 years but still retain the underlying property ownership," he says.
New forms of financing and the availability of cheap debt led to the steep rise of a new breed of pub company throughout the 1990s and 2000s, namely Enterprise Inns - formed when Nomura exited the UK pub sector - Punch Taverns and Admiral Taverns, who came to dominate the sector in a similar way as the breweries had before the Beer Orders. In 2008, there were an estimated 55,000 pubs, 55% of which were held by Punch Taverns and Enterprise Inns.
The ownership landscape changed again during the recession as difficult trading conditions forced the national pub companies to "downsize" and sell off assets in order to alleviate their debt positions.
"Many regional pub companies, as well as individual operators, have been quick to pick up freehold assets," says Neil Morgan, head of pubs and restaurants.
But Morgan believes it is only a matter of time before the national pubcos return to the acquisition trail. "In four or five years' time, we will probably see individual operators selling pubs back to the national pub companies again," he predicts.
In terms of casual dining, there is one family name that looms large over the sector. Phillip Kaye, with his brother Reginald, began Golden Egg in the early 1960s, widely considered the first British high street casual dining chain. In 1979, the Kayes set up Garfunkel's which eight years later they sold for £26m to City Centre Restaurants - now the Restaurant Group.
Phillip's sons, Adam and Sam, went on to create Ask. This midmarket pizza and pasta restaurants company, which included the brands Ask and Zizzi, was bought by private equity firm TDR in 2004 for £213m. The brands are now, along with Pizza Express, part of Gondola Holdings, bought by private equity firm Cinven in 2006. Phillip Kaye's nephew Jonathan is also in the restaurant game as the CEO of Prezzo, an AIM-listed company with annual sales of £86m.
As the co-creators of Café Rouge, entrepreneurs Roger Myers and Karen Jones are also key figures. In 1990, the pair floated the Pelican Group, then built it up to 104 Café Rouges and 19 Dome café bars before selling it to Whitbread in 1996.
"This probably started the trend of pub companies buying restaurants," says Morgan, who recognises an increasing convergence between the pub and restaurant sectors. A more recent example is Greene King's acquisition of Loch Fyne Restaurants for £68m in 2007.
In terms of numbers of sites it is no surprise that many of the top UK restaurant companies are also pub companies. At number one, Mitchells & Butlers has some 800 restaurants and a new chairman, John Lovering, determined to accelerate the group's move away from drinks-led outlets. Whitbread still retains a significant restaurant business.
In summary, there is only one "restaurant" business in the FTSE 250 - the Restaurant Group - but even its brand portfolio includes Brunning & Price, a collection of pubs. There are a handful of restaurant chains listed on AIM - Carluccio's, Clapham House Group, Prezzo - and the remaining main players such as Tragus and Gondola are private equity-backed.
Such major companies create the headlines but let's not forget that the vast majority of UK restaurants - and hotels and guest houses - are owned and run by individual operators. At this end of the market, Christie & Co is noticing increasing interest in daytime deli/coffee shop operations, which do not require an alcohol licence. "They are nice lifestyle businesses since they aren't open in the evening and they remain a great business to buy for those with relatively small amounts of cash from either a house sale, redundancy payment or savings," says Hughes.
If there is one name that dominated the UK hotel scene for most of the 20th century, it is Forte. Christie & Co sold 26-year-old Charles Forte his first business in 1935, the Strand Milk Bar in Regent Street, London, and he went on to amass an enormous hotel and catering empire.
"He probably doesn't get the recognition he deserves because he bought some of the most amazing trophy assets throughout the world by, in some cases, not actually putting any money down, but agreeing vendor loans. Nobody will ever again be able to replicate what he did," says Jeremy Hill, head of hotels.
After the war, Forte bought the Café Royal, also in Regent Street, and in the 1950s he opened the first catering facility at Heathrow Airport and the first full motorway service station at Newport Pagnell on the M1.
In 1970 Trust Houses, a company with its origins in coaching inns, merged with Forte to form Trust Houses Forte (THF). The new group not only owned 215 hotels but restaurants, leisure centres, industrial and airport catering operations, travel agencies, and Lillywhites, a sports retailer.
Indeed, most of the UK hotel chains of the 1970s and 1980s were part of conglomerates. The hotel interests of breweries Allied Lyons, Bass and Scottish & Newcastle, and entertainment and gaming companies such as Rank and Ladbrokes, were relatively minor parts of their overall businesses.
From the Thatcher Government onward, there have been huge changes in the UK and global economies which have inevitably affected hotel ownership. In 1985 the 10 largest owners of UK hotels were all British publicly quoted companies, and nearly all of their hotels were owned or leased by the companies.
In 1996 Granada's hostile takeover of Forte broke up the business and spelled the end of the THF and Posthouse chains.
By 2008 none of the 10 largest hotel owners were brewers, only three were British - Whitbread, Intercontinental Hotels Group (IHG) and Alternative Hotel Group -, only six were publicly quoted, and at least three - IHG, Wyndham Hotels Worldwide and Marriott International - owned virtually none of their hotels but held management contracts to run them.
Brand strength had become paramount and executives with retail backgrounds were brought in to grow hotel chains, which pursued programmes of sale and leaseback, and then sale and management back.
"Hotel chains couldn't achieve the desired level of growth if they had to spend £5m to £10m on every new opening, they wanted a method of expanding more rapidly to get their flags on the map which management contracts and leases provided," explains Rugg.
Many UK hotel companies de-listed from the Stock Exchange in the early 2000s as private equity funds, real estate companies and hotel management teams bought them, spotting unrealised value in separating the real estate from the operating company.
"It's been a way for private equity houses to show very good returns. For example, Permira bought Travelodge with the vast majority of its assets, did the sale and leasebacks and then sold the company on to Dubai International Capital for a phenomenal multiple, the kind which you would expect to apply to a freehold-owning company. Permira had already extracted about £200m from the sale and leasebacks. That's a classic example of getting two bites of the cherry," says Day.
The success of the asset-light model is evidenced by the fact that, today, tangible assets account for about a quarter of the value of the FTSE 250, with intangible assets such as brands, technology and employee talent being the real drivers of company value.
Now that private equity is finding it difficult to identify appropriate hotel acquisitions and plan an exit, Day predicts that UK hotel companies will return to the stock market for finance.
"If debt funding stays difficult and loan to value ratios stay at 65-70% I think we will see a return of the IPO, which we saw after the 1990s recession. Once they can start to show that trading has bottomed out and it's starting to grow, that's the point you will see hotel companies going back to the market," he says.
Christie & Co sold Charles Forte his first business in 1935 and has advised the family for more than 50 years. Forte bought the Café Royal in London's Regent Street in 1954
THE ORIGINS OF CHRISTIE & CO
Christie & Co was established by George Christie, James Owen and Nick Davies, in Baker Street, London, in 1935 and its first advert appeared in Caterer and Hotelkeeper in 1936. Chairman David Rugg, who joined the company in 1972 as James Owen's assistant, is the longest serving member of staff currently employed by the company.
"The founders were estate agents with a general commercial background who started off dealing in property investment in new towns such as Welwyn Garden City, acting for retailers such as Woolworths and placing them as tenants. During the war, a lot of business people were leaving London because it was so badly bombed, so they started to specialise in selling businesses," explains Rugg.
The only male employees not called up to serve with the armed forces during the Second World War were George Christie, on account of his deafness, and Stan Bristow, who had suffered from polio. They kept the firm going throughout the war and spent their nights on the office rooftop on fire watch.
CHRISTIE & CO: KEY SALES
• Charles Forte's first "milk bar" in 1935 - the Strand Milk Bar in Regent Street, London
• Egon Ronay's first restaurant in 1952 - the Marquee in Knightsbridge
• The Jamaica Inn in Cornwall - made famous by Daphne Du Maurier's book of the same name - in 1962. The company has resold the inn several times since
• The Gleneagles hotel in Torquay. John Cleese and his Monty Python colleagues stayed at the Gleneagles in the early 1970s. Their visit provided inspiration for the hugely successful Fawlty Towers sitcom, written by John Cleese and his then wife Connie Booth
• The Waterside Inn at Bray to the Roux Brothers in 1972
• The Thatcher government's privatisation of British Transport Hotels. The portfolio included the Grosvenor hotel in Victoria, the Great Western Royal in Paddington, the Midland in Manchester, Gleneagles and Turnberry
• Hilton London Metropole and Hilton Birmingham Metropole to Tonstate Group for £417m in 2006