Charity: Enterprise edging towards Reit result?

By The PMA Team

- Last updated on GMT

Related tags Goldman sachs Enterprise

Charity: Enterprise edging towards Reit result?
MA deputy editor The PMA Team considers whether Enterprise are edging towards conversion to REIT status

For almost a year now, Enterprise Inns has been exploring the possibility of a conversion to Real Estate Investment Trust (Reit) status.

Last November, at results time, chief executive Ted Tuppen reported that discussions were ongoing and now centred around reorganisation of Enterprise's structure. He also told analysts one intriguing thing: exploring the possibility of Reit conversion was expensive and the company would not be putting itself to this degree of expense unless there was a realistic chance of success.

In January, Geoff Collyer, leisure analyst at Deutsche Bank, noted that the "possibility of Reit conversion permission being granted is not reflected remotely in the share price". Although no one outside Enterprise has a clear steer on the real chances of success, the prospect of Her Majesty's Revenue and Customs (HRMC) allowing Enterprise to set up a Reit is mouthwatering for the company and the sector.

Last week, house broker Morgan Stanley rated Enterprise's chances at 50-50 - and thought the company was just a few months away from revealing an outcome from its HMRC negotiations. It upgraded Enterprise's stock to "overweight" on the basis of its improving risk-reward profile - the degree of upside should discussions prove successful.

Morgan Stanley argues that a Reit conversion could add 100p to 160p a share to Enterprise's value. A note added: "We do not pretend to have any specific knowledge about Enterprise's discussions with HMRC, but the fact that Enterprise remains in talks after such a protracted process must be good news, and we think discussions on the latest proposal should last less time than the original proposal, suggesting a conclusion within three months."

Analysts at Goldman Sachs - the firm that foresaw the

sub-prime crisis in the United States - sees a successful outcome to Enterprise's discussions as a possible catalyst for a re-rating of shares across the pub sector.

My colleague, Mark Stretton, editor of M&C Report, says that Enterprise may obtain Reit status by the creation of a middle company (Midco). He writes: "At one end would be the Reit, at the other would be the Enterprise Opco that would recruit licensees, run the agreements and supply tied products, and in the middle would be the Midco, receiving all the revenues and paying rent on the assets to the Reit."

Morgan Stanley did talk a little last week about the worst-case scenario for Enterprise: "Trading is tough, and if the hoped-for rebound in the second half trading does not materialise, the shares will suffer."

However, Morgan Stanley still insisted it had already incorporated a cautious outlook into forecasts, with two consecutive years of negative like-for-likes, and still came up with fair value at 640p. Last November, at results, Enterprise chairman Hubert Reid reminded analysts of one highly salient point about the quality of the average Enterprise boozer: today's average Enterprise pub - with a combined average Enterprise and licensee profit of £115,000 per annum (pubco: £68,000, licensee: £47,000, including the £10,000 live-in benefit ) - was a managed house back in the early 1990s when the last recession struck.

JDW denies wholesale shedding of pubs

Suggestions this week that JD Wetherspoon has disposed of pubs regularly over the years, on a quiet site-by-site basis, were refuted by chief executive John Hutson. He said that the company has sold two pubs in the past two or three years.

Athough it did sell around 11 site three years ago, Hutson said: "We've been going for 29 years and opened 700 pubs - and in that time have sold fewer than 30.

"There were a lot of older London pubs," he said of the 11, adding, "there's not much of a market for second-hand leasehold pubs." The Anchor in Tilbury, Kent and the Tiger's Head, Catford, south-east London, were the two flogged.

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