Acquisitions to continue in pubs sector

Karl Cushing, business editor, Caterer & Hotelkeeper, reports on what next year has in store for the UK pub industry.

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Karl Cushing

Consolidation and tough trading conditions have been the key issues for the UK pub market this year, and these trends show no sign of changing in 2005. Big is beautiful again and, according to leisure analyst Nigel Popham of Teather & Greenwood, "It's a story that's going to run and run." There are two core elements driving the consolidation. First, the big players are acquiring smaller groups to benefit from economies of scale. Then there are short-term market forces squeezing the operators, especially the small players. "Consolidation is ongoing," Popham says. "And next year you have to factor in a tougher economic background as the full effects of higher interest rates hit." He adds: "There are also concerns about a reduction in consumers' levels of disposable income. That would encourage consolidation, particularly in managed houses, which are operationally very highly geared to sales and what consumers spend." Popham believes the key player is likely to be property tycoon Robert Tchenguiz, as he appears to have unlimited funds, or access to bank loans. He recently acquired 364 pubs from Spirit for £345m and 160 pubs from Laurel for £151m. In the longer term, Popham believes that the 300-strong Scottish pub company and brewer Belhaven is a potential target. A likely buyer would be Greene King, which has just over 2,100 pubs and would like to expand its presence north of the border. Popham also expects to see the owners of Yates on the acquisition trail next year, as the company focuses on rolling out its Ha! Ha! brand.

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Consumer spending may drop

David Liston, a drinks industry analyst at fund manager Gerrard, expects consolidation next year to be at the small-to-medium end, rather than among the quoted companies, with likely deals in the 150-350 pub portfolio range. Liston believes, however, that the key issue next year will be quality rather than consolidation, as the big players continue to churn their estates and dispose of lower-end sites. "I see 2005 more as a year of organic growth," he says. But Punch Taverns recently announced plans to grow to 12,000 pubs, having dipped below 8,000 following the sale of half of its InnSpired estate for £162.5m. And Scottish & Newcastle, which has more than 1,100 leased properties, is also expanding again, having sold its managed estate to Spirit last year. It's not just the big players such as Greene King and Punch that are driving consolidation. The 730-strong London & Edinburgh Inns kicked off the year with the acquisition of 250 pubs and is still looking to buy. Avebury Taverns, which has about 750 tenanted and leased pubs, is also looking for acquisitions. A key factor behind the growth of the large groups such as Enterprise and Punch is that the Office of Fair Trading appears increasingly relaxed in its application of competition rules governing the sector. Often, all that is required for a deal to go through is an agreement to sell off a small parcel of pubs in a given area.

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Wetherspoon: pegged back

But not all companies are primed for growth. Wolverhampton & Dudley Breweries, for example, has its hands full with its £119m acquisition of Burtonwood's 460-strong community pubs estate and the integration of Wizard Inns' 63 community pubs. Greene King, Enterprise Inns and Mitchells & Butlers are also unlikely to be on the acquisition trail in the short to medium term. And the rapid expansion demonstrated by JD Wetherspoon in recent years has been pegged back to about 15 sites for next year. Liston reckons the biggest check on the consolidation trend remains the interest rate, which could have a negative impact on the financing of pub deals if it were to increase in 2005. The full text of this article orignally appeared in *Caterer & Hotelkeeper* magazine, 16 December 2004