Punch's acquisition of Spirit at the beginning of the year exemplifies the revolving-door syndrome of pub ownership.
It also takes Punch back to its infancy, when it ran tenanted/leased outlets alongside managed houses.
Spirit emerged from one-year-old Punch in August 1999 when it was set up with equity from the likes of Texas Pacific to operate just over 1,000 outlets.
This strategy aimed to free Punch from the distraction of running two separate operating arms, leaving it free to concentrate on the leased/tenanted sector.
Since then, Spirit has proved to be as acquisitive as its former parent, its growth culminating in the purchase of the entire estate of 1,400 managed units from Scottish & Newcastle Retail for £2.5bn in November 2003.
Spirit has been as canny as Punch in its disposals - notably exiting the volatile high-street market by selling 178 outlets for £177m to Tattershall Castle in September 2005. Trading difficulties still experienced by Tattershall Castle underscore the wisdom of that sale.
Reuniting the two companies has also set in motion one of the largest transferral and disposal programmes seen in recent years - of 1,832 pubs bought by Punch, about 680 will remain as managed houses, about 740 are being converted to leaseholds and just over 400 are being sold.
Most of these sales have been completed, with Punch netting £700m and reducing the amount paid for the retained 1,420 pubs to £2bn - an average of £1.4m per outlet.
Punch customer services director Francis Patton is sanguine about the progress of the programme: "Acquiring any business always presents challenges, whether it involves a small number of outlets or, as in our case, over 1,800," he says.
Spirit managing director Andrew Knight adds: "Our strategy is to ensure that we build the strongest managed and leased estates possible.
"It has helped that Spirit was formerly part of Punch. We got to know each other quite well as we worked together in the past. Culturally, I've found that strategies adopted on both sides are not at all different - I think we've added value to the leased and managed sides of the business."
Patton agrees: "Both businesses - managed and leasehold - have the same issues to address: increasing quality and improving standards and level of services. The impending smoking ban is a good example of this."
Knight says the aim for the managed-house division is to simplify its structure and divide the forward business strategy into three main strands: quality food, such as Chef & Brewer; value food, such as Two for One, and quality locals such as John Barras.
He recalls integration of the Scottish & Newcastle Retail estate three years ago as "very complex," as a result of the number of brands and business strands that came with the acquisition. "We knew we had to prevent that from happening again," he says.
Knight outlines the questions used to decide whether to convert a pub to lease or retain it as a managed house: "Will the pub make more profit as a managed house or leasehold? Is that profit sustainable? Would it benefit from capital expenditure to stay within the managed estate?"
The pubs that remain managed tend to be larger, higher-margin outlets where food makes a significant contribution to the
bottom line, or where the opportunity exists for adding or increasing dry sales.
Knight says that the ownership selection process offers flexibility and he doesn't
rule out converting some of the now-retained managed houses to leaseholds in the future.
Mitchells & Butlers' recent acquisition of
220 Whitbread managed houses and the Punch/Spirit deal, together with Punch expenditure of £164m on Hill House's 82 pub restaurants, have shaken up the sector.
Knight observes: "There is still going to be some consolidation, but there is less opportunity for acquisitions. We saw Mill House as one of the last small, high-quality estates
remaining in the UK.
"We've made it clear that we want to develop a high-quality managed estate and we want to be successful. You need scale to do that - and you need high-quality sites to get scale."
Conversion to leased
Conversion of the 740 pubs earmarked for transfer is being handled in three tranches: the first involved 212 outlets with average annual earnings, excluding VAT, of £454,000 per pub, and the second phase involved 262 pubs with average earnings of £496,000. Punch left the best until the beginning of this month when it released the final tranche of 266 outlets with average earnings of £504,000 and barrelages of 500 plus.
Pubs in all three tranches have a turnover
of at least £70,000 to £80,000 per annum on food. So far, 100 agreements have been signed, with former house managers accounting for 25% of the total, and another 100 agreements are on the brink of completion of legal
formalities.
Patton says the level of interest is tremendous, attracting "people who wouldn't normally look at a pub - from entrepreneurs and single-site retailers to existing multiple-site leaseholders such as Peach Pub Company".
He estimates that about 15% of the total number of leaseholds will be taken on by former managers of the outlets.
Clearing the decks
The 1,832 Spirit units acquired under this deal were divided into three groups: those intended for immediate sale, those with potential for conversion to leaseholds and those that would be retained as managed houses.
When the proposed acquisition was announced in December 2005, 82 outlets had already been earmarked for sale because they were too small, low-margin or didn't fit into one of the three main business streams.
After the £2.7bn deal was agreed in January 2006, the remaining 1,750 pubs were analysed on a site-by-site basis to decide their future ownership.
The number sold has now swollen to 400, raising a total of about £700m. This group includes 290 Country Carvery and Q-branded outlets, which were sold to Orchid; the Old Orleans estate sold to Regent Inns, "gold brick" outlets such as Bar Room Bar and gastropubs such as Lots Road in London's Chelsea.
Outside Inns outlets will remain as managed units and will be converted to family-oriented venues using the Wacky Warehouse model.
Geof Collyer, Deutsche Bank
How will the sector develop
over the next five years?
"The late-night market will continue to struggle. Before the Licensing Act, there were 4,000 venues with late licences - now there are 44,000 and you can see the
difficulty this presents for those such as
Ultimate and Luminar. Operators charging people to enter their premises after 11pm will struggle as many places don't do this.
"Next year's smoking ban will be a big issue. Outlets in England and Wales are generally better able to cope than those in Scotland because there aren't as many
landlocked pubs. It will be interesting to see how Scottish operators cope as their ban enters the winter months. Coming to terms with the ban will take between three and five years, but I think it will stimulate overall growth in the pub market.
"The eating-out market is still growing at 3.5% per annum, so I foresee more companies diversifying into food and a blurring of the boundaries between pubs and restaurants."
What are the secrets of running
a successful managed estate?
"The general high-street retail market
survives and prospers by giving the public want it wants; service and standards, rather than the product range, drive the business.
Pubs have been around for centuries, but it is only in the last 10 years that there has been progress in understanding what
customers actually want. Companies that will be successful are those that pay attention to detail and are customer-led, offering
service with a smile instead of a scowl."
Which companies are doing
particularly well?
"Mitchells & Butlers (M&B) has put in a colossal effort - it's one of the best
retailers around. If M&B quad