Heritage picks up the pieces

When Heritage took on the 240 pubs controlled by Pennant Inns it was in for a shock. Mark Stretton reports.

A pennant is the symbol of a winner - and right next to pennant in the English dictionary is the word penniless.

The irony will not be lost on the 240 licensees whose pubs were formerly controlled by Pennant Inns. The company that had the name of a winner had amassed debts of about £7m and, when its management contract was scrapped in the summer, left most of its licensees between £3,000 and £5,000 out of pocket.

Heritage Pub Company came along to pick up the pieces. What Heritage found was a sad, tired pub estate starved of cash and a bunch of disenfranchised licensees.

"The last time somebody made an investment in these pubs was when John Smith's owned them," says Heritage managing director John O'Neill. "That was 10 years ago. They have probably had three or four owners since then and in essence most people have milked the pubs for what they could get out of them."

Since taking the pubs on in April, Heritage has embarked on a £6m investment programme to bring the estate up to speed. Tellingly, the first aim is to get its 240 pubs watertight, with working heating systems installed before the cold winter chill kicks in.

The most needy have been dealt with first and by all accounts some of the pubs were in a pretty desperate way. "We knew there would be issues and a high level of investment would be needed, but it's a bit like buying a house," says John. "Somebody does a survey for you but until you get in and peel off the wallpaper and turn the lights on and off a few times, you don't really understand what you've got."

Straight after the deal, John and the two Heritage founders John Finney and David Harrison embarked on a tour of all 240 pubs, which are mostly scattered across the Midlands and the North.

One of the first stops was at the Nag's Head in Leeds. Externally the pub looked okay. Inside, the trading area looked okay. The licensee then asked the Heritage team if they would like to see her living accommodation. "It was all bare floorboards," says John, "there was no bathroom, no kitchen and the tenant was living in just one room because all the others didn't have ceilings - they just went straight up into the roof. I have absolute admiration for her - I don't know how she put up with it."

The Nag's Head was one of the worst, but going from site to site a familiar pattern began to emerge of leaking roofs, holes in the walls and no heating.

"You don't expect to walk into a pub and see gas heaters everywhere," says John. "It was quite remarkable because many of the pubs looked crap on the outside and crap on the inside yet people were still drinking in them - testimony to the licensees."

Heritage has had six months of putting things right. When the investment programme is complete in two years time every pub will have been at least redecorated and re-signed.

It is the second coming for the company. Its first life came to an end when John Finney and David Harrison sold 55 pubs in December last year to tenanted giant Pubmaster for £18.9m - not bad considering the business was started in the early nineties with £8,500. The two entrepreneurs, friends from school, built the company from scratch, initially buying pubs from Mansfield. As well as beer, the brewer supplied loans, which financed initial growth.

At the time John O'Neill was working for Mansfield and that is how the three got to know one another. When he got the call to come aboard Heritage to help take on the pubs that Pennant had been managing, he was working with Brian Field at Essex brewer Ridley's.

The 240 pubs were actually owned by Atlas Way, a North London property group. Atlas originally asked the Heritage founders if they would like to take over the management contract from Pennant. The reply was a polite thanks, but no thanks - they didn't fancy managing pubs owned by someone else. In the end, a deal was put together with Heritage buying all the freeholds of the pubs but with Atlas Way taking a 50 per cent stake in Heritage.

The sale to Pubmaster paved the way financially. "The 55 existing Heritage pubs were sold with the vision of buying 240 pubs from Atlas," says John O'Neill.

The deal was valued at £43m and Derby-based Heritage is expected to turnover about £11m in its first year. John O'Neill is MD, John Finney commercial director and David Harrison finance director.

Pennant, the penniless outgoing management company, had not even bothered to communicate to tenants what was happening. The Heritage boss tried to persuade Pennant chairman Kevin Feeny to write to licensees to inform them of the pending changes. "He couldn't accept the reality of what was happening around him," says John. "Kevin felt that the transaction wasn't going to happen so he wouldn't communicate with the tenants or staff.

"We ended up writing to the tenants to say 'we are Heritage and we have bought the pub you are sitting in'."

First there was the uncertainty that a change of ownership brings, and then there was the news that licensees would not get their deposits back from Pennant. There is little danger of licensees seeing that cash as Pennant is now with receivers Grant Thornton.

As well as repairing pubs, Heritage has spent the first six months trying to repair relationships with understandably suspicious licensees. "We had to explain that we didn't have their deposit money," says John. "To them we were just another pub company. We had to draw a line in the sand - we can't go back but we can help with what's happening now and in the future."

The three Heritage directors went on roadshows, giving licensees the opportunity to meet the people behind the company name. They faced an initially hostile crowd, most of the anger directed at Kevin Feeny and Pennant Inns. "It would have been lovely to have Kevin Feeny with us," says John. "But unfortunately we had to stand there and take most of it. It was perfectly understandable - these people had lost a lot of money. But I think by standing in front of them and explaining ourselves, we won a certain amount of respect."

Heritage business development managers are charged with visiting each pub twice a month for the "overkill" effect - needed to engender good relations with tenants. It is having the desired impact - some licensees say they are sick of the sight of the Heritage team.

"We are now in a period of doing what we said we would do. Putting the pubs right," says John. "I know partnership is a clichéd word, but we are building proper partnerships. This is a bit like an oil tanker. There are times when it's frustrating that you can't go at the pace you want to and it will take time. But we are doing what a pub company should do - supporting the tenants."

John O'Neill on...​

• Smoking in pubs:​ "Ultimately the consumer will decide. The consumer rules and if they want clean air they will get it because they are the ones that substantiate our business. I think we will have legislation regarding air quality but I do not see an outright smoking ban."

Sky TV:​ "Like most people I think it's completely outrageous. Sky says it is not operating a monopoly but that is bollocks. For a huge amount of people watching football in the pub with mates is the reason for being there. It has to be a monopoly - they have total control."

Social responsibility:​ "Most of our pubs are community businesses and do not really operate the offers seen on the high street but I do not think people should be encouraged to consume alcohol beyond a sensible level. Most people tend to regulate themselves."

John O'Neill CV​

John O'Neill, 45, started his career a