Groups find value in pub deals

Despite a seemingly impenetrable succession of deals, takeovers, break-ups and acquisitions in the pub industry over recent years, it is possible to identify several key themes.

The break-up of Avebury Taverns is a prime example of the different directions in which the top and bottom ends of the tenanted/leased pub market are now going.

Formed in 1997, Avebury had about 700 pubs when its management staged a buyout from Credit Suisse First Boston in February 2004.

Just a year later, in February 2005, management and investors decided that, in an era of huge pub companies, being 10 times smaller than the biggest was not going to work. Accordingly, they called in specialist leisure corporate finance adviser PC Hansen.

Hansen came to the conclusion that no single buyer would want to acquire the lot. Those pubs doing good business, it decided, would be attractive to companies like Punch, which had a history of buying venues with strong income streams and which could be securitised* at an attractive rate - theme one.

But about 40% of Avebury's estate comprised lower-end boozers: pubs without enough income to make them worth putting into a securitisation.

However - and theme two - there are a growing number of pub operators who have the skills and contacts to use the properties in more lucrative ways, often by changing their use.

Accordingly, Hansen split Avebury into two and sold 253 lower-yielding pubs to Admiral Taverns for £69.75m. This represented an average outlet EBITDA (earnings before interest, tax, depreciation and amortisation) of 24,900 a pub or 11 times total outlet EBITDA.

Admiral Taverns, owned by a consortium of property investors including Gary and Alan Landesberg, owners of the private property company Mapleleaf Group and the house builder Galliard Homes, had already bought about 30 tail-end pubs from Avebury. Few of these properties are likely to remain as pubs for very long, as their true value lies in alternative use. The same is likely to be true for many of the outlets in its latest purchase.

Then, this month, the 409 remaining "top-end" Avebury pubs were sold to Punch Taverns for £233m including debt. This price meant EBITDA for each outlet averaged £53,800 - more than twice as much income per outlet as the pubs Admiral bought.

This is equal to 10.6 times total outlet EBITDA, or less than the bottom-end pubs went for.

From Admiral's point of view, however, it wasn't overpaying. Simply, it saw different, more valuable sorts of income possibilities in the properties it bought.

It follows, then, that with the supply of high-end pubs suitable for income securitisation drying up, future growth opportunities for operators like Admiral, happy to buy pubs that are not great performers, are likely to be much greater than for someone like Punch.

Indeed, observers expect Punch to sell off several hundred of its own bottom-end pubs in the near future, probably to a similar kind of operator to Admiral. The sale would raise money for more purchases and raise its average outlet EBITDA, thus increasing the amount of cash it can raise through securitisations.

Meanwhile, in the high street market, an entirely different set of pressures is fuelling consolidation. Here, branded bar operators are looking to cut overheads per outlet and achieve purchasing savings through increased numbers. They are trying to rationalise the brands available in order to control consistently ferocious competition.

The big difference in the high street arena is that nobody wants to buy underperforming outlets. Laurel's purchase of the bulk of SFI, owner of the Bar Med and Slug & Lettuce chains, involved a complicated gavotte which saw the worst 52 outlets placed in the hands of receivers - who promptly shut 26 of them as not worth trying to sell on as going concerns.

Recent big deals

• July 2005: Punch buys Avebury's 410 top-end pubs for £219m.
• July 2005: Greene King buys Ridley's 73 pubs for £45.6m.
• June 2005: Laurel (owned by Robert Tchenguiz) buys 98 of 150 sites owned by SFI for £80m.
• June 2005: Charterhouse buys high-street pub operatos Barracuda for £262m.
• May 2005: Admiral Taverns buys Avebury's 253 bottom-end pubs for £70m.
• May 2005: Wolverhampton & Dudley Breweries buys Jennings Brothers' brewery in Cumbria and 128 pubs for £67m.
• May 2005: Laurel buys Yates Group and 150 pubs and bars for £202m.

Deals in waiting

• Sale of Luminar's entertainment bars division - postponed.
• Sale of Spirit's 180 high-street pubs - looks increasingly unlikely.
• Approach by Punch for Spirit.
• Sale of Uribium - put in play by an unwanted approach from Regents Inns.

\* Securitisation: raising funds by converting assets or future cash-flows into marketable securities.

(1) Many run on behalf of other owners, such as Robert Tchenguiz's Globe Pub Co, with 600 outlets

(2) Many run on behalf of other owners, such as Admiral Taverns

(3) Formerly Pub Estate Co.