The current perfect storm will batter the entire pub market, says The PMA Team
A few weeks ago, I talked about the savage shake-out in the high-street bar market.
Over-leveraged companies have been unable to invest in the upkeep of their assets. It would be easy to name a series of operators whose sites look shabby.
This has combined with a perfect storm of external factors, including the smoke ban, the slowdown and sharper off-trade prices, to depress sales.
It leaves the large well-invested high-street operators — JD Wetherspoon (JDW), Mitchells & Butlers (the UK's second largest nightclub operator) and Luminar — in a position to out-perform in a very difficult period of change.
The signs of distress have been very visible, with companies collapsing into administration. Many of these forces are no less avoidable in the community and suburban pub market.
In an off-the-record chat, one senior industry figure described the minus 9% beer volume collapses of the past nine months as "catastrophic".
He thought the declines could worsen on a year-on-year basis to between minus 10% and 15%. It feels like a fundamental wrench at the fragile underpinnings of large parts of the pub universe.
By rights now, the pub closure rate should accelerate. Tenanted pubs, like their high-street managed cousins with a poor market position or low-amenity level are, unfortunately, getting hammered by the vortex of inclement market and economic forces. The figure of 8,000 pub closures is getting bandied around. It's unlikely that anybody can avoid feeling a share of this pain.
Painful pass the parcel
The sale and leaseback of pub freeholds, like super-fast pre-pack administrations, has become an area surrounded by controversy.
Spirit Group's former private equity owners oversaw a sale and leaseback that produced a number of pubs where the rent was more than 100% of the earnings. Some of these super-toxic leases have done the rounds like a pass the parcel that nobody wants to open.
Private equity boss Jon Moulton was temporarily stuck with a bunch of these nasties when Alchemy Partners acquired Tattershall Castle Group out of Spirit. His answer was to find somebody to take a juicy reverse premium to take them off his hands.
Interesting then that his other pub business, Inventive Leisure, undertook a sale and leaseback of its 12 or so freeholds last year leaving the estate entirely leased.
There appears to be a marked difference of approach though. The proceeds — around £17m after expenses — look set for sensible use: to pay down debt and fund expansion.
Also, crucially, the rents have been set at a modest 40% of Ebitda. And this in a company whose performance since the smoking ban has been in the top decile, albeit with flat like-for-likes.
M&B's striking sell-off
Mitchells & Butlers (M&B) has revealed it has sold around 40 pubs for £50m in its first half, the vast majority for alternative use. The striking thing is that they sold for 18 times earnings.
Ebitda was a little under £3m so this set of pubs was producing earnings per site of around £75,000 each on average. Under the normal multiples that apply, a trade sale would have achieved circa £750,000 per pub.
Alternative use sales produced an average freehold sale value of around £1.25m.
For M&B shareholders, it's a reassuring result.
If a pub is producing massively below-average earnings, chances are that the alternative use value is more than a safety net — it's a positive inducement to sell. It helps, of course, that the average M&B alternative-use pub is a handsome building, often with a sizeable parcel of land attached.
Two years and (ac)counting
Sharp-eyed City analyst Jeffrey Harwood, of Oriel Securities, has noticed one hugely conservative piece of accounting at JDW. Its fixtures and fittings (F&F) have a book value of £61.4m yet it booked a depreciation charge of £28m this year.
At the current rate of depreciation, the value of its fixtures and fittings will have been written off within two years.
The equivalent figure at Mitchells & Butlers is seven years. In other words, within a few years JDW will have no fixtures and fittings value to depreciate and will look like a different proposition in profit terms.
Meanwhile, Harwood has been checking out prices at his local JDW, the Green Man, in London EC4, since November 2004 and has found that in the past year food prices have been static, while a sample round is up by 8% in price.