By the end of the year, there will be just three pub companies left in the FTSE 350. Spirit and Punch have already been sold to Greene King and Patron / Heineken respectively, and both Ei and Greene King are in the process of being acquired.
The sector has changed beyond all recognition, but after suffering from a long period of decline, investor confidence in pubs seems to be rising, albeit not in the public markets.
Just last week, one of Asia’s richest men, Sir Li Ka-shing, agreed to buy Greene King in a deal valuing the pub operator at more than £4.5bn. The move comes after a fall in the value of the pound, and alongside a growing interest for UK beer in China. The purchase of Greene King is essentially that of a property investment and demonstrates a level of confidence in the UK long-term. Greene King owns most of its 2,700 sites, and it therefore fits well with Li Ka-shing and CK Asset Holdings’ investment model of stable, cash flow generating businesses with real estate backing – and the logic is not dissimilar to Proprium Capital’s investment in Admiral just last year.
Only last month, a £3bn offer was accepted from TDR Capital – the private equity owner of Stonegate – for the UK’s largest pub company, Ei Group.
The commercial benefits of combining the two businesses are compelling. The deal will see Stonegate, already the largest privately-owned managed pub operator in the UK, become the nation’s largest pub company with more than 4,000 sites compared to its current 760. Established in 2010, Stonegate’s estate consists of traditional pubs dotted all over the UK, as well as leading branded bars such as Slug & Lettuce, Yates and Walkabout. Stonegate’s CEO Simon Longbottom commented that this is “a great story for local communities and the high street…the combination of these two businesses will be great on several levels, with customers, tenants and communities at the forefront”.
These industry-shaping deals have highlighted a newfound confidence in the pub sector. Although the number of pubs overall is still falling, the rate of decline has slowed significantly over the past year or so. Recent City Hall data shows the number of pubs in London remained stable between 2017 and 2018, after dropping by more than a quarter since 2001.
The unusually hot weather, England’s run at the World Cup last summer (it was estimated that pubs sold an extra 40 million pints during England’s football matches alone) and increasing consumer sentiment towards more authentic, local experiences that feel bespoke as opposed to branded have tipped the balance back towards the sector. The quality of Britain’s pubs has also transformed with companies investing in new concepts like craft alcohol, non-alcoholic drinks and premium mixers. In the final six weeks of 2018, pubs generated a sector-wide like-for-like sales increase of 5.1%, outperforming the 2.4% made by restaurants. At the same time, the British Beer & Pub Association reported that beer sales grew by more in 2018 than they had for 45 years.
Due to stable trading, the sector has attracted investment from inside and outside the UK. Just a few months ago, Fuller’s, whose beer includes London Pride, sold its entire brewing business to Japan’s biggest brewer Asahi for £250m. Back in 2017, Dublin-based Magners producer C&C Group – along with US investor Proprium Capital Partners – acquired the 845-strong pubco Admiral Taverns.
The more recent attention from investors is good news for pubs since this year PE firms are set for their highest number of deals as record-low interest rates spur debt-fuelled company buyouts. In fact, a report by Bain & Company forecasts a high of 212 “take-private” transactions this year, compared to the previous all-time high of 192 achieved in 2007. The flurry of activity comes at a time of record-low interest rates, which have helped private equity buyers secure cheap financing for deals. At the same time, private equity firms are raising record amounts of cash and are under pressure to put it to use. Some of the biggest names in the industry have recently raised their largest funds. In Europe, CVC Partners, BC Partners and EQT are all expected to hit the market with new multibillion flagship funds early next year. In this economic climate, private equity firms are searching for certainty. Despite low consumer confidence, the numbers have shown a resilience across pub trading, which may prove to be the “safe haven” investors have been looking for.
With the sector’s strong performance, and more attention from foreign and domestic investors, we’re left wondering which other pub businesses could be up for grabs. Perhaps Marston’s will be next – does a debt pile of £1.4bn make it increasingly susceptible? In any case, we probably won’t be waiting long to find out…