Six and two threes
The Sunday Times deputy business editor John Waples examines what will happen after the Six Continents demerger.
Between now and next April, Tim Clarke's roadshow to sell the merits of a demerger of Six Continents' retail arm will gain momentum. While there is an outside chance a private equity group could table an unsolicited offer for the company, such a move is unlikely.
There appears to be strong internal commitment at Six Continents to pursue a demerger and it would have to be a knock-out bid to make the board change course. In the current economic climate it would be surprising if any bidder would want to get involved in a contested bid.
To a private equity buyer the managed pubs group, which includes brands such as Vintage Inns, Harvester, O'Neills and All Bar One, would be worth between £2.5 and £3bn and it is hard to identify buyers with an appetite for such a deal.
Also if there were any, it is likely they would want to secure the services of the management team who as well as Mr Clarke (pictured) include Mike Bramley, Tony Hughes and Karim Nassar. The pub industry is full of capable entrepreneurs but many have stumbled as they have moved from niche operators to running larger companies with a more mature earnings stream.
In Mr Clarke and his operations directors there is a team with a track record of running a FTSE100 company committed to delivering value for shareholders and there are few people around with that level of experience.
Based on conversations Mr Clarke has had with industry peers in recent weeks it is clear he is relishing the opportunity to run his own show and there are many who say that despite being chief executive of Six Continents he has always had to play second fiddle to his chairman Sir Ian Prosser. Post the demerger this will not be the case and Prosser will remain with the hotel business.
Mr Clarke has the financial headroom to quickly grow the pubs group and he has been tapping his peers for advice on ways to raise additional capital.
The leisure team at Deutsche Bank says that because the retail business wants to demerge with its current investment grade status intact, its debt will be limited to £1.3bn. However, Deutsche Bank estimates an additional £1bn could be raised and one obvious route is through an asset-backed securitisation.
There is little doubt the big prize for Mr Clarke was to pull off a merger with Scottish & Newcastle's (S&N) pub estate and there is clear frustration that S&N shied away from the deal. But there are other acquisitions that Mr Clarke could make, although they would not be on the same scale.
Deutsche Bank says Regent Inns and Whitbread's pub estate would make suitable targets as would the two private equity backed pub companies Laurel and Spirit. Both of these companies are well managed but they would benefit from scale.
The demerger is not without difficulties and Mr Clarke and his non-executive chairman Roger Carr need to educate the City about where the earnings growth will come from and what distinguishes them from other pub groups.
One other area that needs to be addressed is how to sort out an exit for Six Continents' American investors. They now account for 20 per cent of the group's share register and they will have little appetite for holding stock in a domestic British pubs business. John Waples is deputy business editor of The Sunday Times.
