A man who owns a lot of pubs told me recently that anyone pondering what his equity in the business is worth "needs to go to the Priory".
The simple fact is that there's almost no point in trying to work out what a pub estate is worth because there are no buyers for batches. And if there were, they certainly wouldn't be paying the 10-times earnings
they were forking out quite recently for tenanted pubs — six or seven times earnings might be a much more sensible multiple for bottom-end pubs.
The two largest tenanted pub companies, Punch Taverns and Enterprise Inns, have been affected, in share price terms, by concerns about what pubs are actually worth (or will be worth by the time the recession is over).
Both companies thought they had sold those pubs most likely to be affected by the smoke ban before it was introduced on 1 July 2007. Both companies have now identified around 500 pubs they want to sell because they are unviable: they simply will not provide a decent income for licensee and pub company.
For Punch, lower trade levels have meant a sizeable write-down. Enterprise has stopped buying pubs, and its acquisitions team has switched to selling these bottom-end pubs.
Performance of the two giant tenanted estates, with a total of 15,000 pubs, can be split into three: the good, the quite bad and the ugly. A solid core of at least 80% of tenanted pubs on substantive agreements are performing well from the pubco's point of view. At 82% of Enterprise pubs, Ebitda actually grew 2% to a per-pub average of £73,000.
There is a second group of pubs — the quite bad — that are effectively in "intensive care", receiving special help in the form of increased beer discounts or rent concessions. Around 1,400 pubs within both Punch and Enterprise have received this special help at some stage in this current year, normally on a time-limited basis.
Enterprise has helped around 850 of its pubs in this way at any given period, and claims 70% of those pubs pull through this "special-needs" period and stabilise.
The cost to both Punch and Enterprise of this special help has been running at close to £1m per month. The run-rate cost of support at Enterprise hit £1.3m in September. The biggest test of durability of these pubs will come in the traditionally quiet months of January, February and March next year. Enterprise has budgeted to step up its support to as much as £15m in the coming year.
The third group of pubs — the ugly — are closed and/or ear-marked for sale. Both Punch and Enterprise have around 200 pubs that are simply shuttered or not paying rent.
Unviable sites
Pubcos are having to sell unwanted sites individually, often for alternative use. The most recent Enterprise pub-estate valuation showed 4,900 of its pubs had increased in value (on the basis that they are producing income growth for Enterprise) and 2,500 fell, with the balance remaining stable.
The second and third tiers of tenanted pubcos in terms of size show a similar performance pattern. Both Admiral Taverns and Scottish & Newcastle Pub Enterprises (S&NPE) run just in excess of 2,000 pubs. Any notion of running around 3,000 pubs is, for the moment, unfeasible.
Admiral Taverns has a core of 1,600 pubs where performance is stable. It has 250 pubs closed or ear-marked for sale and has been selling 10 pubs a week to individual buyers. There are a further 400 in "intensive care" where it plans to intensify support in the hope of stabilising performance and retaining them. Similarly at S&NPE, which manages pubs on behalf of third-party owners, the core estate is around 1,700 pubs.
At the heart of the problems for tenanted pubcos has been the strong reliance on beer income. Around half of all income derives from beer sales. With beer volumes down by around 8% across tenanted estates this year, there has been an obvious impact on tenanted and pubco landlord alike. It is, as one pubco chief admits, a structural problem with no obvious, ready solution.
Enterprise boss Ted Tuppen talks about the need to work "smarter and harder" this year to achieve the same result. At the moment, there still appears to be a market for individual pubs — Tuppen talked about local builders and supermarkets, for example, snapping up sites. It's just as well, because the emergent theme is a dash to cash.
Concerns about debt levels mean the days of using company cash or increased debt to buy back shares is truly a thing of the past. The strategy now is to try to turn uneconomic pub assets (a negative drain on company coffers if they're closed) to cash by a sale. It's a good time to pick up the odd cheap freehold pub.
Warren Buffett, the fabled investor, talks about looking for assets that are, metaphorically, cigar butts that offer a good decent smoke. Some pubs being sold are like that — there's a income there for the right buyer.