Recent flotation could result in OFT's involvement
by David Clifton, one of thePublican.com's legal team of experts from London solicitors Joelson Wilson.
According to my Roget's Thesaurus, the word "punch" falls into the same category as "rain of blows", "spanking" and "fisticuffs". All words that Punch Pub Company may feel describe the mood and intentions of certain Punch lessees at the moment, with fighting talk of rent-strikes, involvement of MP's and a report to the Office of Fair Trading (OFT).
All this follows hot on the heels of a damning article in the Financial Times the day before the intended first day of trading in the company's shares, criticising the tenanted business model.
The Punch Flotation
The much publicised flotation last month certainly drew attention to the complaints and grievances of Punch lessees. Quite how many of them have good grounds for dispute with Punch at the moment may be a matter for debate, but I suspect that a reasonable number will fall within the 1,500 to 2,000 pub lessees who are members of the Federation of Small Businesses.
Complaints to the Office of Fair Trading
As reported on this site, within the next month the Federation is to submit a report to the OFT on behalf of lessees complaining about high rent and beer prices charged by the large pubcos. They claim that, were it not for the terms of their pub lease agreements, they could buy beer outside the tie at a fraction of the cost.
The response from the pubcos is that the terms of such agreements reflect the fact that lessees take on less personal risk for a lesser initial capital outlay than owners of freehouses, and as such are given a quick and relatively cheap entry into the trade. The downside is that they are bound to pay higher beer prices and the contractual rent that is payable under the lease agreement.
So what is a flotation?
It's basically the same thing as "going public", "seeking a quotation", "going for a listing" or "coming to the market". The intention is to raise cash from selling shares to the public. In the case of Punch, the original intention was to float 40 per cent of the company's shares. In the end, it sold 30 per cent. A flotation also serves to establish the value of the company in the market.
The price at which the shares are valued is really a matter for the company and its financial advisers. If they assess too low a price, the company and its existing shareholders will not raise as much cash as they could have achieved. If they assess too high a price, the risk is that no-one will want to buy the shares. Punch's 30 per cent sale at the reduced issue price of 230p per share raised £174m and gave the company a value close to £600m.
Now that the flotation has taken place, the shares can be bought and sold on the stock market and the value of the shares (and accordingly, the company) will rise or fall according to the market's perception of the company's performance and future prospects. What is clear is that the sellers of the 30 per cent shareholding in Punch Taverns have made a lot of money.
And what is the Office of Fair Trading?
The OFT is a government body formed to protect consumers and to ensure that UK businesses compete and operate fairly. It aims to make businesses and markets work effectively and beneficially for consumers. Its objective is to encourage vigorous competition between fair-dealing businesses to enable good companies to flourish and, in doing so, offer consumers a reliable and fair service. In pursuit of this objective, the OFT operates in the following three main areas:
- Enforcement
- The OFT champions the rights of the consumer and aims to ensure that the rules and legislation put in place to protect the consumer are adhered to. This may result in the OFT taking court or other legal action against businesses where necessary. Wherever applicable, the OFT aims to encourage self-regulation rather than the imposition of regulations by an independent body. The OFT also aims to deter all forms of anti-competitive behaviour and has the power to refer any such behaviour to the Competition Commission.
- Investigation
- The OFT has the power to investigate markets and businesses proactively in order to establish whether they are working well for consumers. Its investigations cover not only the behaviour of businesses themselves but the nature and implementation of government legislation and industry codes of practice, as well as their impact on consumers and businesses. Where, as a result of such investigations, the OFT deems it necessary to take enforcement action or make recommendations to government, this action is published.
- Communication
- The OFT communicates to consumers and businesses to show how competitive businesses and markets that work efficiently, effectively and profitably are important for consumers. The OFT champions fair dealing businesses, and is tasked with explaining its decisions transparently and promoting compliance by explaining to businesses what the law is and how the OFT will apply it. The OFT also advises the government on how to achieve the most effective regimes for both competition and consumers.
- The OFT's website can be found at www.oft.gov.uk.
Related articles:
Group goes to OFT with lessees' rent and beer price grievances (13 June 2002)
Pubcos under fire from their disgruntled lessees (30 May 2002)
Pubco giants under attack over high rent and beer charges (23 May 2002)
Punch Taverns float resurfaces (21 May 2002)