Punch figures open door to opportunities
Two years ago, Punch's Giles Thorley and his management team decided that managed pubs, selling for a substantially lower multiple at eight times earnings than tenanted pubs, were undervalued. Punch bided its time and eventually bought Spirit and its 1,800 managed pubs for £2.7bn - or 7.9 times earnings after synergies. Much to the surprise of many, Punch set about running its own managed division. Thorley and his team have quickly proven his point on undervalued managed pubs by selling a total of 389 Spirit pubs for £723m - at a handsome 10 times outlet ebitda.
This series of canny sales has left Punch with a core of 700 pubs it intends to retain as managed pubs, for the time being, and another 750 it is converting to lease. The average cost per retained pub has come down by 6% with the overall quality of the core managed estate improved. Punch's results last week were expected to shed fresh light on whether it would remain in the managed pub game for the long term. Hosting a table of journalists for lunch last week Thorley was, as you might expect, giving little away beyond emphasising that the decision rested upon what would maximise shareholder value. The common sense of this is that Punch is pre-occupied this year with re-moulding Spirit for two possible futures. The first involves creating a high-class managed division platform that is positioned to thrive in an increasingly food-led future. The second involves a sale to any number of companies keen to scale up - Laurel, Greene King, Wolves & Dudley, Mitchells & Butlers, GI Partners et al.
During the summer, Punch acquired the 82-strong Mill House Inns estate in a move that indicates its willingness to let its Spirit position run for a while yet. Part of this play, of course, involves increasing the value of core Spirit by achieving trading gains. A commendable 6% increase in like-for-like sales in the core estate indicates Spirit management is thriving under new ownership. One fascinating segment of Punch's presentation emphasised the quality of the three divisions in core Spirit. Quality Food (Chef & Brewer) has 136 pubs with a weekly per-pub turnover of around £21,000. The average number of covers is 1,300 per week (100 higher than Whitbread on average) and food represents 56% of sales. Value Food (Two for One) has 154 pubs where sales average £20,090 per pub each week. Average covers per week comes in at 1,850, less than 100 short of the Mitchells & Butlers pub restaurant figure, and food sales are 54% of all turnover.
The biggest portion of core Spirit is Quality Locals with
399 pubs. Average sales per pub per week are around £13,600. Food is still an important element of sales at 19% of turnover with 500 covers a week. Overall, average sales are £17,000 per week and average outlet earnings are an average of £290,000. If Punch decides to cash in its managed chips next year, as many expect, crush barriers may need to be erected to avoid managed players hurting each other in the rush.
Meanwhile, the conversion to lease appears to be going smoothly, helped by the retention of the managed division to ensure these assets do not fall away in trading terms during the long lead times involved in this process. For would-be licensees, incidentally, the bargains at Punch sit in the tranche of Spirit pubs being moved over to lease.
On assignment of existing leases, new Punch licensees are paying an average premium of £80,000 to take over pubs producing an average of £35,000 per annum including the £8,000 live-in benefit. Brand new Spirit leases cost a lot less than £80,000 and produce more than £50,000 a year in earnings for licensees. I know where I'd be looking to invest my money. There's one other facet of the way Punch does business that deserves a mention. It's moved into the absolute top tier of the sector in terms of communication, openness and transparency. I'm talking about the way it communicates with its retailers - and the outside world. This way of doing business has become embedded in its culture - and is a credit to it.
