Martin's private equity swipe is too general
JD Wetherspoon (JDW) founder Tim Martin's comments on celebrity binge-drinking grabbed all the headlines last week. But just as interesting were his comments on the negative effect of private equity ownership (and influence) on pubcos. His condemnation was fairly wide-ranging - and, to my mind, unfair on several points. He told me that he thought the Robert Tchenguiz-backed plan to sell off Mitchells & Butlers (M&B) freeholds was "completely ridiculous". His views, albeit expressed in more moderate language, were shared by a significant number of the City's senior and best-respected leisure-sector analysts. There's no doubt the plan was a radical departure from the business model that has served M&B so well since demerger - and the medium-term result of stripping out of its freeholds is to leave an operating company with a far-from-certain future. So far, so good.
Martin wanted the Financial Times to look at the performance of Laurel Pub Company to see if Tchenguiz's big idea passed muster. News emerging from Laurel Pub Company will have confirmed to many that stripping out freehold assets has weakened the company as it struggles with a relentlessly upward rent roll.
Even Martin agrees that, in Laurel's case, Robert Tchenguiz may "have taken a hospital pass". The vast majority of Laurel was leasehold in the first place. Its plan to go into a "controlled administration" results from buying too many dud leaseholds. Laurel is doing JDW an expensive favour by trimming high-street capacity. The company has 42 Yates's sites on the market - if they sell, they become unbranded. Yates's has often been JDW's closest competitor in price terms.
Tchenguiz is investing heavily to revive Laurel's best high-street brand, Slug & Lettuce. This is where Martin's criticism is particularly hard to understand. He claimed heavy investment by private equity tended to cause sales to flare up before a sale, with sales levels unsustainable long term. This, he argued, caused instability. It seems strange to blame private equity and venture capitalists alone for this. High-street history is all about quoted public companies over-investing in opening high-street sites, without proper brand differentiation. A decade ago, we saw withdrawal of major brewers from untenable high-street positions. Now, JDW stands to gain as Laurel and others shake loose poorer sites opened by, supposedly, nimble-footed specialists such as SFI Group and Yates's.
Which other companies might Martin be talking about? Let's exclude Barracuda Group because this company has focused on organic growth from a small base - and has been around a long time. Alchemy Partners doesn't really fit the bill. Its Inventive Leisure has a well-positioned, differentiated offer making steady organic progress. The Tattershall Castle Group business seems to have made slow progress - and, if anything, needs faster investment. Orchid Group might be a candidate for Martin's opprobrium. It's spending more than £50m converting around 290 sites and rolling out new trading formats at a speed that many, who prefer to test until destruction, find startling. Equally, success will depend on whether its ideas stay the course - and, goodness knows, these sites needed investment. Private equity investment is, essentially, no different to that made by quoted companies.
In retrospect, investment in managed pubs by a host of public companies has produced variable results leading to variable share performance. Private equity is putting its money where its mouth is. Many pension-fund members will have their future returns dependent on the quality of these investment decisions. When it comes time for GI Partners to sell its Orchid investment, it will be a case, as always, of caveat emptor. This is predominantly an estate of good quality freeholds.
Martin's strongest point seems to be the merits of sale-and-
leaseback. Spirit's former private equity owners were guilty of some of the raciest the sector has seen - and several companies now live with the consequences. But sale-and-leaseback is also a feature of the quoted arena - Regent Inns is currently involved in raising cash from its freeholds in this fashion.