Punch keen to exploit managed pub options

Ever since Punch bought the Spirit Group managed business in January 2006, observers have wondered how long the company would remain a managed player.

Some City analysts appeared distinctly uncomfortable about Punch moving away from its tried and trusted tenanted business, where returns are as steady as steady can be.

A year ago, Punch boss Giles Thorley adopted a mantra that covered all bases. Punch was running a managed division "for the time being" although the business was "not in the departure lounge". Last week's results at Punch had Thorley still using the "for the time being" phrase. However, a distinct change of tone seemed to indicate a strengthening of the level of commitment to managed pubs.

The truth, of course, is that Punch has shown itself to be the most flexible and lateral-thinking business in the whole sector since flotation five years ago. By definition, that means all options remain open. But Thorley was hinting that by keeping a managed division Punch maximised its own options.

The outcome of tireless rounds of buying and selling pubs is ownership of one of the highest-quality leased and managed estates in the sector. Earnings from its 7,000 tenanted pubs have risen 20% from £58,000 per pub to an industry-best figure of £70,000 after the Admiral disposal and conversion of 334 Spirit pubs to lease - with quite a bit further to go thanks to conversion of almost 400 more Spirit pubs. Its core 800-strong Spirit division enjoys 27% more earnings per site - £280,000 compared to £221,000 per pub - than the Spirit batting average when it was bought.

Punch has been deftly unlocking loads of value in every part of the Spirit business: it has profited from selling unwanted Spirit pubs; will make an estimated 10%-15% more per annum (£125,000 per pub) from the 700 pubs it converts to lease than when they were managed, and will have a well-positioned managed division where food sales are an industry-leading (not counting Whitbread) 39% of total sales.

A big clue as to future intention came with the bolt-on acquisition of 82-strong Mill House Inns last September for £164m - £2m per pub. Thorley told City analysts last week that Mill House was an example of a "good value" deal still available in the managed pub sector. Mill House, predominantly freehold sites, had been bought on the same multiple of earnings as Gondola, a predominantly leasehold restaurant company, had been sold the same week. He said such deals allowed Punch to acquire an operating company and freehold property when others were paying premium prices simply for operating companies.

The Punch boss called the situation an "anomaly in the marketplace" of a kind Punch would continue to look out for. The current managed-house strategy would continue until Punch could "see better alternatives".

Explaining the strategic importance of its acquisition of a half-share in wholesaler Matthew Clark, Thorley indicated that 40% of Punch lessees were buying wines or spirits from Punch, but this only accounted for an estimated 10% of its wine and spirit requirements. Any improvement would provide a "very significant return" on the firm's investment.

Thorley said the acquisition provided the company with "certainty in the long-term". Those supermarkets controlling route-to-market have tended to be the most successful - and "This is a route to market," he said. As to whether details of customer accounts could be seen by Punch, he said: "Perfectly usual cloaking arrangements are in place," adding that the acquisition provided Punch and its lessees with access to "significant new skills".

It's worth remembering that 73% of Punch income still comes from its leased estate. With major growth coming from wines, spirits and soft drinks, it must make sense for Punch to position itself to maximise buying power and expertise in these areas. I can easily imagine Punch buying more managed pubs, further improving the quality of its leased estate through conversion and adding to the scale of its core managed division.