Under the terms of the acquisition, each City Pub Group (City Pubs) shareholder will be entitled to 108.75p in cash and 0.032658 of a new Young’s A Shares for each City Pubs share, valuing City Pubs at approximately £162m.
According to Young’s, it has closely followed the City Pubs estate for some time and holds the premium, well-invested and wet-led approach in high regard, and also recognises the skillset, expertise and experience of City Pubs’ employees.
City Pubs’ predominantly freehold portfolio of premium, individual and well-invested pubs and bedrooms presents an attractive opportunity for Young’s to drive future growth.
The transaction represents the “rare opportunity” to acquire a high-quality pub and bedroom portfolio of scale, allowing Young’s to increase its managed trading estate by 50 pubs or 20%.
The transaction will also allow Young’s to substantially increase the number of premium bedrooms within the estate, by adding 240 bedrooms – an increase of more than 20%.
Through operational alignment with the broader Young’s estate, Young’s anticipates increased like-for-like food, drink, and bedroom sales across the City Pubs estate, while continuing Young’s strategy of consistent year-on-year investment at attractive returns in its pubs and bedrooms.
The culture of Young’s and City Pubs’ businesses are closely aligned, both championing an entrepreneurial approach, underpinned by strong ambience and customer service and facilitated by supportive and engaging team members.
The City Pubs estate therefore closely fits Young’s strategy to operate premium, individual and differentiated pubs and bedrooms.
The transaction therefore represents a significant opportunity to accelerate Young’s existing growth strategy and create value for all stakeholders of the combined group.
In particular, Young’s notes the transaction is expected to be earnings enhancing in the first full year of ownership, retaining a strong balance sheet with a target to return to below 2.5x leverage over the short to medium term (on a pre-IFRS 16 basis).
This represents a premium of 46% to the closing price of 99p per City Pubs share on the last practicable date, and 65% to the volume weighted average closing price of 88p per share over the three months ended on the last practicable date.
Simon Dodd, CEO of Young’s, said: “We are excited to be announcing the proposed acquisition of City Pubs, with the full recommendation of their board.
“City Pubs is an excellent business we have followed for some time, and one which aligns closely with Young’s in terms of both strategy and culture.
“Like us, City Pubs operates premium, individual and well-invested pubs and rooms, with a focus on the highest standards of customer service. Both businesses have performed well in a tough trading environment recently, testament to the strength of our business models, people and approach to customers.”
He continued: “We believe City Pubs is an excellent fit with Young’s and the combination of the two businesses represents a compelling opportunity for all stakeholders.
“It will allow us to expand our estate through the addition of a complementary, high-quality pub and bedroom portfolio, with the potential for the benefit of significant operational synergies to be realised by both sets of shareholders, through the partial share offer.”
Clive Watson, executive chairman of City Pubs, added: “All at City Pubs can feel very proud of what has been built up over the past 12 years. City Pubs was an EIS start-up that began trading in March 2012 and now has an estate of 50 premium pubs in the great cities of southern England and south Wales.
“Like all hospitality businesses, the pandemic derailed City Pubs’ progress, but it has been able to produce a strong performance since with a more focussed, reshaped business with the lowest debt in its history and a solid strategy in place.
“The City Pubs board has therefore been able to evaluate today’s recommendation from a position of strength. Mindful of the uncertain economic climate, high interest rates and inflation in particular, and our plans for long-term growth as an independent company, initial approaches were rejected.
“However, following careful consideration, we believe the transaction is in the best interests of City Pubs’ shareholders with the ability to realise 75% of the equity in cash at a material premium to the current share price together with a stake in the future upside.
“The board believes the transaction significantly accelerates the value that could be realised in the short term by City Pubs if it were to remain independent. Additionally, the City Pubs board is reassured by Young’s similar entrepreneurial culture and its approach to investing in the business.”
Houlihan Lokey is the leader adviser to City Pub Group on the deal.