REITs could spark pubco deals

The tax authorities' decision to grant Enterprise Inns the right to convert into a real estate investment trust (REIT) could signal a new phase of corporate activity across the pub sector.

Shares in a number of leading pub companies rose as investors anticipated a dividend bonanza following Enterprise's announcement, although by this afternoon its shares had lost much of yesterday's gains.

Some observers in the Square Mile said that with the right conditions a number of pubcos might be vulnerable to takeover, especially those with a lower proportion of income derived from a tenanted or leased estate.

Panmure Gordon's Douglas Jack said that for some companies retaining independence would be an issue. Marstons would be most under pressure to demerge its tenanted/leased pubs (which contribute to 56 per cent of profits) in order to stay independent, Jack believed, but added its management was in "no hurry" to do so.

"Nevertheless REIT legislation increases the likelihood of the company becoming a takeover target at the hands of Punch Taverns," he said.

Punch was in "no immediate hurry to convert to a REIT (due to low tax exposure); neither does it appear to be any hurry to sell or demerge its managed pub division", Jack said, while with Greene King's tenanted and leased pubs accounting for less than 40 per cent of its profits it should be the least likely to consider converting into a REIT, he added.

But one pubco chief executive said a lot was being read into the REIT situation that would not necessarily see the light of day.

"There is much to look into here and people should and no doubt will be exercising caution," he commented.

A possible casualty of the drive to become a REIT would be investment in pubs, he added.

"If your gearing is high and you are going to hand over 90 per cent of your earnings in the form of a dividend how much cash will you have left to put into your estate?"