Punch: Spirit is not for sale

Punch Taverns has rebuffed an approach by Mitchells & Butlers (M&B) to buy its Spirit managed division.

The company has claimed any deal to sell Spirit would not be in the best interests of its shareholders at the moment. Punch has also been exploring the option of joining forces with a private equity player to take a stake in M&B. These discussions have also been ended because they would not further the interests of its shareholders.

A source close to Punch said: "Spirit is not for sale and Punch is walking away and this bars it from an approach for six months. From Punch's perspective it has tried to create a value-enhancing deal and it's not been possible to create an outcome that's acceptable to shareholders." ​

At the end of March, Punch withdrew a proposal to merge with M&B on a 50/50 basis with a £175m sweetener for M&B shareholders. M&B then turned the tables by makng an approach to buy the Spirit managed division.

Some observers thought that Punch might be open to selling Spirit on the basis that it would allow it to follow the possible path of Enterprise Inns in converting to a tax-efficient real estate investment trust (Reit) more easily.

However, current market conditions would not allow Punch to realise the best returns on a managed division sale. Moreover, Punch Taverns chief executive Giles Thorley has been making it clear at recent results presentations that operating a managed division is a key piece of operational strategy. Not least because it tops up the top-end quality of its tenanted division as some pubs are converted to lease over time.

Punch also indicated that its interim results, to be unveiled on 24 April, will be in line with market expectations.

Analyst comment: Kate Pettem of Landsbanki:​

We do not know the reasons besides the obvious one, agreeing to a price, but they could have included the cost of dealing with the Spirit Issuer securitisation of which the assets form part, whether Punch would retain an interest in the business, and obstructions by some Mitchells & Butlers'shareholders or even its management. ​

For existing Punch shareholders, the company has said that interims will be in line with market expectations which we believe to be for profit before tax of approximately £130M. If there is no fillip to the shares from an asset sale and trading is in line, we believe it prudent to change our stock recommendation to reduce from hold, with a 530p target.

We are concerned that the Spirit division, while now a more focussed operation, will require capital investment to match the returns of its listed competitors, and that Punch's balance sheet cannot be much stretched at this point.

As for Mitchells & Butlers, its opportunities to make radical changes that add value appear to be slim. Buying Georgica's Tenpin Bowling or selling Hollywood Bowl to Georgica would be a relatively small transaction. We also believe the rumoured sale of InnKeepers Lodges and adjacent pubs to Whitbread is unlikely.

InnKeepers average 29 rooms per site and range from 9 rooms to 85 rooms, so are generally smaller than a Premier Inn. Mitchells & Butlers does hold some Express by Holiday Inns which may be appealing as Premier Inns when they are free to be sold, but that transaction would again be relatively small. We retain our Reduce recommendation on Mitchells & Butlers.