The note by Alex Chatterton argued recent share price weakness at City Pub Group (down c.32% since the end of February) and improving freehold mix (up to 65% from 58% at IPO) has made it a more attractive option to a potential acquirer.
Panmure Gordon believes Fuller’s could generate significant funds to help with its acquisition strategy to acquire managed freehold pubs if it were to sell its tenanted division.
Assuming a conservative discount to an average of the most applicable recent transactions, the tenanted inns division could generate an enterprise value around £156m, based on an EV/EBITDA multiple of c.10x.
Meanwhile, with City Pub Group’s share price now below the IPO price, it has become more attractive to a potential acquirer.
Assuming a 30% premium to the current share price, its enterprise value would be c.£144m.
Therefore, Chatterton concludes Fuller’s could acquire the Clive Watson-led company if it were to sell its tenanted inns divisions without having to increase its borrowings or raise equity.
Based on its analysis, Panmure Gordon estimates Fuller’s could generate an additional net c.£45m of revenue and increase adjusted profit after tax by a net c.5%.
Combining the managed pub businesses would create synergies, with only relatively modest costs of separating Fuller’s managed and tenanted businesses.
Based on reviewing valuation for direct peers, Panmure Gordon reports City Pub Group looks “notably cheap”, while recent trading shows its revenue is on an upward trend and above 90% of 2019 levels.