London and Edinburgh Swallow Group's (LESG) sudden collapse into administration has been met with a discernible lack of surprise by industry commentators.
Administrator Ernst & Young was called in last Thursday after the company admitted "increasing heavy [financial] losses". The hotel and pub chain's demise followed Caterer reports in March of industry fears that the company's financial structure was not robust or sustainable.
Hotel industry consultant Melvin Gold said it was not unexpected: "The problems relate to the rapid pace of expansion and acquisitions under their highly leveraged leaseback business model, which had obvious risks that have now come to fruition."
Clive Hillier, director of asset management company Vision, agreed: "There was always a perception that the rents the property company charged back to LESG were above current levels and therefore their sustainability was questioned."
But Gold said LESG's struggle didn't mean the hotel or pub sectors would now fail. "It's just one flawed business model," he said.
James Shorthouse, director at property agent Christie's, agreed but feared there could be a fallout for the pub sector. "It's not going to do the public perception of the pub industry any good," he said. "It's a real shame as the sector had become a recognised investors' asset class."
Shorthouse said the real losers would be individual freehold owners who had bought the pubs at auction at inflated prices, but would now find a massive value gap between what they had paid and rent levels attainable in "the real world".
LESG's collapse had initially sparked fears of up to 7,000 job losses, but 2,500 have been salvaged by freehold owner Flodrive through a £1m deal for fixtures and fittings at 240 properties.
Timeline: countdown to LESG crash
- 1996 London Inn Group (LIG) is founded by Alan Bowes.
- 2000 Acquires 47 pubs from Greene King for £7m.
- 2003 Takes control of 13 Swallow hotels from Whitbread for £52m, and buys the Swallow brand name rights for £5m. Acquires 252 pubs from Punch Taverns for £57m.
- 2004 LIG acquires 30 pubs from Valley Inns, Tager Inns and Western Castle for £8.9m, buys 13 hotels for £60m and launches React Inns, a management company for problem pubs.
- 2005 Acquires the 56-strong Yorkshire-based Publico Pub Company for £20m, eight hotels from Corus for £32.9m and 20 hotels from North British Trust Group for £61m.
- 2006 Acquires Carnoustie Hotel, Golf Resort & Spa in Scotland and the three-strong Scottish Freedom of the Glen hotel group.
- September 2006 Appoints Ernst & Young as administrator.
By Emily Manson