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Britain’s latest export – the pub?

By Nicholas Robinson contact

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Analysis: what does the Greene King deal mean for pubs?
Analysis: what does the Greene King deal mean for pubs?
This year has been one of the biggest years for pub trade mergers and acquisitions in recent times, leading many to question what the future has in store for the humble British pub and the pubcos behind them.

An air of bewilderment has been wafting over the sector this year, which intensified into something close to panic this month when Greene King announced a potential sale to Hong Kong property and investment company CK Asset Holdings (CKA).

As soon as news of CKA’s interest went public, hundreds of commentators weighed in, voicing opinions of doom and disaster for the future of the traditional British pub. But is that really the case?

In all types of business, there is an element of merger and acquisition, with the pub trade being no different and undergoing its own consolidation over the years. But, so far in 2019, we’ve seen Fuller’s sell its brewing arm to Asahi – keeping its property business – Ei Group propose a sale to Stonegate and now Greene King’s intention to sell too a foreign investor.

As well as the big headline deals, there’s also been a substantial number of smaller deals, from sites in the single digits to triple digits being sold between pubcos large and small.

But the idea of a non-British company owning one of the UK’s oldest pubcos struck a chord with Brits, especially those from the trade who claim it is the end of an era. The chatter harks back to similar rumblings in 19 January 2010, when the UK’s much-loved chocolate manufacturer Cadbury sold to American plastic cheese producer Kraft.

To put it bluntly, all hell broke loose, with UK consumers stopping short of rioting in the street to ensure ownership of their beloved milk chocolate brand remained in the hands of Brits. But, guess what? Under its US owner, Cadbury stayed on supermarket shelves, its heritage and familiar marketing strategy continued and Cadbury Dairy Milk remains the UK’s biggest-selling chocolate bar. It could also be argued that Cadbury’s ownership is seldom thought of when a customer picks up a chocolate bar.

But it appears to matter more when it comes to the pub, possibly because it is an intrinsic part of our heritage and DNA going back hundreds of years.

In reality, pub ownership has evolved and changed drastically from its original incarnation. Starting in the 1950s, major breweries snapped up a significant proportion of properties, forming the ‘big six’, which owned half of the nation’s pubs, selling 75% of the beer.

However, in 1989, a Monopolies & Merges Commission inquiry into the tied house system concluded there was a problem, resulting in a decision that no more than 2,000 pubs could be tied with the rest being free. So, instead of freeing 11,000 pubs from the tie, the big six sold off bundles to newly formed pubcos.

Since these pubcos didn’t have breweries, they could have estates as big as they liked, resulting in Punch Taverns and Enterprise Inns (now Ei Group) owning 8,000 sites each.

Those with a good short-term memory will remember what’s happened in recent years, with Punch selling a huge chunk of its estate to Heineken’s Star Pubs & Bars pub arm in 2017 and Ei Group recently offloading 412 sites from its property portfolio in January this year.

In the midst of all this M&A activity, the number of operational pubs in the UK has declined by more than 25% or 10,500 since 1989, giving Brits roughly 41,301 to choose from as of 30 June this year, according to data from real estate adviser Altus Group.

2,700 Greene King pubs

Considering such change has happened in just a lifetime, it’s hardly a shock a foreign investor is eager to get in on the action. If the deal goes through, CKA will receive 2,700 pubs for​ £2.7bn, including to 1,000 managed wet-led venues; 270 Hungry Horse sites; 150 Chef & Brewer pubs; and 70 Farmhouse Inns.

Some, however, already know this wouldn’t be CKA’s first venture into the market, with the group having already dipped its toe in with its ownership of 136 venues that are leased to Greene King. But, now the water has been tested, it appears CKA is ready dive in head first.

There is a lot of speculation around why the move has been made​ now. Writing in his column for Bloomberg shortly after the deal, Michael Msika pondered the timing of CKA’s chair Victor Li’s decision, arguing the weak pound was likely to have made things all the more tempting. At the time the deal was announced, the pound was trading against the Hong Kong dollar at levels similar to those in the mid-1980s, he wrote.

Yet, with around two months until Brexit and future currency weaknesses possible, it wouldn't be unlikely for other UK assets that "look cheap on paper" to be scooped up, he continued.

Yet, it’s not just Britain’s pubcos overseas investors are interested in, analysts at Morgan Stanley noted more private equity funds are eyeing up UK businesses, giving the Asahi/Fuller’s deal as a prime example.

Analysts at Barclays, meanwhile, have cited several other hospitality businesses like Whitbread, but gave Marston’s a special mention due to its similarity to Greene King, as likely M&A clobber.

Also, in a column for Bloomberg, Chris Hughes writes that the deal cements the future​ of the British pub, saying, if nothing else, that CKA's interest in Greene King was a sign, no matter what happens following Brexit, that “Brits will keep drinking beer and eating pies”.

CKA's attractions to Greene King were obvious, since the UK pub sector had shed capacity over the years, with those remaining adapting their offering. This, Hughes wrote, was in contrast to the beleaguered casual-dining sector which has undergone struggles.

As Hughes pointed out, the sector has shed unprofitable and failing sites, focusing on the better trading venues and converting more into managed houses, making them more attractive to investors. Ei Group, before its Stonegate deal, for example, aimed to grow its managed estate to more than 400 this year, with eyes on a further 100 by 2020.

On the topic of property, many sceptics fear CKA’s interest in Greene King is purely to do with the prime real estate locked up within the portfolio. There is a genuine risk with any acquisition that a buyer could syphon off parts of a business or individual properties for profit and keep a smaller estate with more financial potential.

Spectators have argued this could be a tactic employed by​ Greene King’s potential new owners. “This is basically a pub property deal, it’s about real estate,” said Peter Martin, contributing editor to The Morning Advertiser’s sister title MCA.

“In a sense, we have been here before,” he continued in a piece written by MCA​ deputy editor Georgi Gyton. “People look for stability by investing in freehold and long-leased pubs, which Greene King has got – it is seen as a good place to be. My reading of the Stonegate acquisition of Ei Group, is that it’s about buying real estate and this is another example of that.

“[The Greene King deal] is a good deal. What it says for the industry is that when people are looking for stability in turbulent times, property is still a good bet, and the pub trade in particular is a good bet, with long-term assets.

“In a sense, we should be surprised that people want to invest in pubs; it’s a vote of confidence in the longevity of the sector – it’s just that it’s come all of a sudden.”

A negative look

The Guardian’s​ economics editor Larry Elliott, however, gave more of a negative look at the deal ​, highlighting the fact that a significant proportion of Greene King’s pubs are in coveted areas of the country, but was particularly sceptical about CKA’s kind words about the business.

It was in CKA's investment to say it was impressed with Greene King's strong cash flow, but warned any regular thinking the deal wouldn't lead to pub closures had "probably had one too many".

It is not unreasonable to make this assumption, however. The price of pubs has increased just as much as houses over the years, if not more. A Fleurets Survey of Pub Prices 2018 found in 2008, the average price was £377,555, however, while there has been some fluctuation in prices over the past decade, the most recent figures reflecting 2018 was an average price of £445,537. This is an increase of £67,982 – up 18%.

Yet, it’s not just the future of the properties under scrutiny. Greene King happens to be Britain’s largest brewco, leading many to question the future of the beer side of the business. “The news that Britain’s largest pub and brewery company has been sold to an international asset company is very concerning for our beer scene,” said Campaign for Real Ale (CAMRA) national chairman Nik Antona.

“We are always wary of one company controlling the largest share of the market, which is seldom beneficial for consumers. Greene King has been in operation for more than 200 years and it is a very sad day to see such a well-known historic and respected name exit the brewing and pub business.

“We hope Greene King will continue its operations as normal without any disappointing changes. We will be calling on the new owners to retain the current pub portfolio to safeguard thousands of pubs and jobs across the country.”

City Pub Group chairman Clive Watson, also quoted in MCA, ventured that English breweries are a bit like football teams in the sense they can offer a quick financial reward for overseas investors.

To others, however, recent transactions and proposed deals are part of the trade’s natural evolution. “It feels like consolidation was bound to happen,” said West Berkshire Brewery managing director Tom Lucas.

“It’s a shame that some of the longer-standing brewers have decided to sell but these things are natural. This industry is moving incredibly quickly at the moment.

“Asahi taking Fuller’s and now trying to compete with Heineken and Molson Coors, that macro level is slightly above where we are, we’re competing on a much smaller scale.

“I don’t see it as a bad thing. One of the things I thought when I was getting into this was if our mission is just to make sure that people are drinking better beer then the fact that bigger companies are buying breweries who are making better beer is going to be better for consumers. That’s one way of looking at it.”

It is clear there will be continuing change in the pub trade, but what is unknown is how much more interest there will be from overseas investors. The question still to be answered is whether or not the humble pub will go the way of so many other British classics – Cadbury, Rolls-Royce and Branston pickle to name a few heritage brands that are no longer in the hands of Brits, but survive with a similar, if not the same, outlook as when they were founded.

Related topics: Greene King

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