Get set for a busy year

Related tags Smoking ban Real estate investment trust Mergers and acquisitions

Looking at how 2007 might pan out, I see three significant factors affecting the pub sector: more merger and acquisition activity, the possible...

Looking at how 2007 might pan out, I see three significant factors affecting the pub sector: more merger and acquisition activity, the possible introduction of REITs (real estate investment trusts), and, of course, the introduction of a smoking ban across England and Wales. Let's look at each in turn.

2006 saw a high level of mergers and acquisitions across all sectors of the world economy, fuelled by relatively low costs of borrowing and the desire, from the banking sector and private equity houses, to leverage up deals to record multiples of debt/EBITDA. While interest rates have risen in recent weeks, there is a long-term stability in rates that will give many plenty of comfort. In 2006 some great traditional businesses disappeared or merged, while Punch, Greene King and Admiral Taverns all remained highly acquisitive. Others, sadly, suffered a different fate, including London & Edinburgh Inns, Yesteryear and Provence — a word of caution, perhaps, that all is not always as it seems.

We can expect to see more acquisitions and disposals in 2007 — with speculation mounting regarding the future of some regional brewers and whether some of the heavyweights will get into bed together in the coming months. One other area to consider in this frenzied marketplace is the role of the venture capitalist. Most private equity firms look for an exit in three to five years — so expect to see plenty of activity in this part of the sector in 2007. Also expect to see plenty of disposals as operators critically examine their estates ahead of the smoking ban.

What of REITs, which became available on January 1 2007? I don't claim to be an expert on the subject, so here is a layman's view. Being a REIT allows UK Stock Exchange-listed companies exemption from paying corporation tax on profits and gains from their investment business (tax-exempt property rental business) subject to certain fairly restrictive criteria. REITs are tax-efficient (to a degree) investment vehicles set up to develop, manage and sell property.

The big stumbling block may be the two per cent entry charge (of the market value of the property being put into the REIT) and any costs associated with debt restructuring. The big operators seem interested but are waiting for evidence to see how this new legislation will benefit them. It is easier to see why property companies might convert to a REIT structure but it is not as simple for a pubco that earns income from food and drink sales as well as from rents. This could lead to more opco/propco type structures, leaving the property company controlled by the listed REIT, but whether a pubco would want its main assets potentially controlled by another party is still unclear.

Finally, of course, 2007 sees a smoking ban come into effect in Wales on April 1 and in England on July 1. Much has been written on this subject and there is undoubtedly much more to come. The winter trading results in Scotland will give many of us a good steer as to the real impact of the ban. Ireland seems to be recovering quite well from an initial downturn.

Most operators have been investing in smart outdoor heated facilities for the smoker and food will become an even more important factor in pubs following the ban, so expect to see a shift in drinking habits and patterns and visitor demographics.

In Ireland, for example, the ban has opened up new markets in morning coffee and afternoon tea, with more female and elderly customers visiting cleaner, smarter pubs that offer a wider range of products and services.

2006 ended strongly for many in the industry. 2007 will inevitably be another challenging year, but the robustness of the industry and the quality of the management in the sector will undoubtedly see it through.

Geoff Newton is relationship director, UK Licensed Trade at Barclay's Bank

Related topics Other operators

Property of the week

Follow us

Pub Trade Guides

View more