The lure of managed profits

Gone are the days when folks bought and sold blocks of tenanted pubs in an effort to expand ad infinitum.

The five major deals of the past six months (Ha Ha Bar & Grill, Mitchells & Butlers' (M&B) wet-led pubs, Geronimo Pub Company, Balls Brothers and Cloverleaf) have all featured managed pubs, the part of the market where there's likely to be further consolidation.

Both M&B and London-based Young's have become a lot less conservative as they pursue high-quality managed pubs with the right market position — their shared aversion to commercial leases visibly softened when they bought Ha Ha Bar & Grill and Geronimo Inns respectively.

Put simply, they decided that too many profit opportunities were being missed by avoiding retail leisure parks, shopping centres, airports and other high-footfall locations where freeholds aren't on offer. Regardless of the short-term squeeze on middle-class income, the demand for high-quality but affordable eating out will continue to expand. Five major managed pub operators — M&B, Greene King (GK), JD Wetherspoon, Marston's and Whitbread — are all engaged in a major land-grab.

This week, GK swooped for Cloverleaf Pub Restaurants in a deal that looks extraordinary at first glance. At a price of £56m for 12 sites, the company has spent more than £4.5m a venue — and for pubs a long way north of Watford Gap services.

Rival Marston's will have arched an eyebrow in the belief that it can open these sites in greenfield locations for much less.

It was noticeable that GK was keen to talk about the purchase price as a multiple of Cloverleaf earnings at a point in the near future. Indeed, Cloverleaf was valued by Jones Lang Lasalle at just £35m last year and one well-placed industry source in the managed sector told me in the past month that "no one will pay market exit multiples up to £5m per pub" on Cloverleaf.

But the deal reminds me of GK's star buy, Belhaven — many thought the price and risk was excessive. GK is obtaining a dozen highly-evolved pubs — food is a remarkable 69% of total turnover and Cloverleaf brings considerable carvery expertise (40% of turnover). Not the smallest part of Cloverleaf's attraction is a pipeline of a further 10 high-quality sites. One analyst points out that the run-rate EBITDA multiple will be closer to 7x once the 10 sites in the pipeline come on stream.

Managed players are now scouring various avenues for high-quality acquisitions. GK, for example, believes it has as many as 50 tenanted pubs that might be converted back to managed pubs — there have been a number of Hungry Horse developments already.

Managed companies will also be scouring the Morning Advertiser 250 list of multiple managed operators looking at companies with high-turnover sites and good freehold content. I can think of a number.