How over-rented leased pubs took their toll on Cains

A copy of administrator PricewaterhouseCoopers' (PwC) information memorandum on Cains Beer Company reveals some compelling statistics on why the company failed at the start of August.

The company's pub property estate was three quarters leasehold, with just one third — 26 pubs — owned freehold. The reverse takeover of Honeycombe Leisure in May 2007 for £37m increased the estate to 102 pubs, but brought with it this large leasehold element.

Cains' bosses Sudarghara and Ajmail Dusanj wanted to recreate the vertical-integration model that has stood the regional brewers they so admired in such good stead. However, the administrator's report on the business shows what a huge toll its pub company leases took on the company's financial strength.

It's also fair to conclude, in retrospect, that the brothers themselves made the company's position more untenable by persuading Punch to allow them to go completely free of tie. The brothers wanted to increase the margins of the brewing side of the business by supplying their own pub estate.

It was at the start of this year that the brothers persuaded Punch — with whom it had 20 pubs — to remove the beer tie completely in return for rent increases.

A total of 14 of the 20 Punch sites already had very high discounts, but Cains pushed for complete supply freedom, and faced a further small uplift in rent at sites that were, arguably, already over-rented.

The strategy's success relied upon volumes staying steady, or even better, increasing. Cains' 48 leases with Punch and Nectar, a vehicle owned by Admiral boss Gary Landesberg and partners, produced a turnover of £10.52m in the year up to the company's collapse, but lost £1.9m. (When Cains went into administration in August after the Bank of Scotland refused to extend its facilities, it had announced losses of £4.5m. There was also around £13m owed to the taxman.)

It works out at a loss of £39,604 on every leased site it was running, in a financial year that still had four months to run at the point of administration.

Rent as a percentage of turnover within its 20 Punch pubs stood at a disastrous 28%. The 28 Nectar pubs' rent-to-turnover percentage stood at an only slightly better 25%.

In other words, the 48 pubs leased from Punch and Nectar were bleeding cash because, effectively, rent levels were massively out of kilter with turnover. (Cains was losing three times more money on its Punch pubs than its Nectar sites — £67,000 per site compared to £19,000 per site).

The pubco leases make a stark contrast with the 26 pubs where Cains owned the freehold — they turned in a handy pre-tax profit of £679,000 on a turnover of £4.93m. The 19 third-party leases Cains was operating were also making a modest pre-tax contribution of £24,000 on a turnover of £3.54m.

A well-placed source says: "I think you'd have to say the Dusanj brothers were a little bit naive in requesting to go free of tie.

"For a start, Cains' beer portfolio, although very good, doesn't have the brand power of some of the products they replaced. Selling only Cains products — associated so strongly with Liverpool — in a pub in Manchester is a red rag to a bull."

Rent concessions​

It is understood that eventually Cains approached both Punch Taverns and Nectar bosses to talk about its rent problems. To the eternal credit of both companies, it is also understood that both made massive concessions. In the case of Punch, for example, the concessions were worth around £450,000, while Nectar's owners were prepared to drop rent by around £250,000 on a rent roll of £2m.

Both companies conceded, effectively, that the market had seen a downturn and it was only fair to re-base their rents at Cains' sites. Corporate law allows for the failure of businesses without punishment for directors, assuming they act in good faith. In the case of Cains, the Dusanj brothers ring-fenced some of their property assets rather than throw them all into the Cains pot.

There is some justification in claiming that the brothers' property-holding company, Stanhill, was charging Cains a very full rent — £600,000 a year — for the brewery building and nine pubs.

They'd decided before the Honeycombe deal not to put the entire family silver on the line. A clause in the letting contract to Cains that would have doubled the rental to £1m a year for any other tenant meant the brewery was inevitably going to bounce back to them out of the administration process. (Sources close to the Dusanj brothers point out that £1m was in fact the open-market rent for the brewery as valued by GVA Grimleys).

Nevertheless, the Dusanj family lost a lot of money — around £3.5m — in the collapse of Cains, despite best efforts to make a success of the enlarged business.

One industry source who is owed money in the wake of the collapse of Cains told me this week: "I've got nothing against them. They were a bit naive and some of the things they chose to do — going free of tie at the Punch sites — were bordering on the suicidal. The best thing they can do now is to keep their nuts down — and make a huge success of Cains mark two."