Pubcos go separate ways over AWP tie

The bruising Business & Enterprise Committee report on the pubco/tenant relationship in May this year was no less than a major body shock for the sizeable tenanted companies.

For those pubco bosses who attended the oral hearings in December 2008 (and others down the size pyramid) it amounted to a volley of shots across the bow. The report contained urgent calls for reform in a variety of areas, making the point that nowhere near enough had been done in the way of change to the pubco/tenant relationship in the five years since the 2004 TISC report.

Fuller's chairman Michael Turner made it clear a few weeks after the latest report that he thought "public rhetoric" would no longer be enough to satisfy the authorities. In his urbane way, he was telling the bosses of his larger brethren that it was time to wake up and smell the coffee. And, as it happens, there is no denying that, on a variety of issues, the critics of the pubcos had been proven right. One such glaring area was the machine tie.

Deutsche Bank analyst Geof Collyer commented that it came as a bit of a surprise that the machine tie issue had become even more opaque since 2004. Privately, senior pubco executives have told me that for years they knew that the machine tie status quo was plain wrong, but were stuck with their existing position.

Punch Taverns has been fortunate in one sense — a new tenanted division head, Roger Whitehead, has been able to make a clean break with the past. The order of the day at Punch has been very much an embracing of glasnost and perestroika.

The BEC report, like the earlier TISC report, called for an end to the machine tie. The major pubcos met at Everards in late May to hammer out a response that concedes changes to the machine tie, but sticks to the principle that the pubcos add value in the provision of machines. The major concession centres around an end to rentalising the licensees' share of machine income.

Last week, there was a lot more detail from Punch on exactly how much this would cost in pounds and pence. The sums involved are not negligible and explain the obvious reluctance to give much ground in the past. The average Punch pub produces £5,000 of machine income. Of this, Punch has taken £2,500 per annum, while the licensees' nominal income has been £2,500. But the licensees' income has been "rentalised", which has meant essentially that Punch has added £1,250 to rent. From 1 August, Punch business development managers have been ordered to give this money back to licensees as rent reviews and re-lets occur. As ever, the existing contractual landscape has a massive bearing and this major change will take as many as five years to fully implement as the rent review cycle is fully completed. A further change will follow on: licensees will not pay more than the market rent for machines. This will allow Punch to continue to pocket royalties (suppliers suggest they are worth £20 a machine per week), but a little more money will slide back to licensees.

City analysts have been told by Punch that the changes will cost around £2m a year. But there is a rolling cumulative cost (there are around 800 re-lets and 800 rent reviews a year) so the eventual cost will be around £8m a year by Year Four.

It feels a tad churlish to mention it given Punch's commendable move to come clean on this, but it has pocketed tens of millions of pounds that rightfully belongs to licensees in the five years since the 2004 report.

The defence of the status quo is that licensees have, after all, signed up willingly for the machine income division that pertains. It gets torpedoed, of course, by the obvious lack of transparency. Nevertheless, and to restate, Punch's move amounts to a new start, a rebalancing of the pubco/tenant income equation. It's still not entirely clear that this will be enough to satisfy the critics in Parliament and those elsewhere.

The situation is complicated by the stance of Punch's counter-balance in size terms, Enterprise. As ever, it's chosen to go its own way on machine income and there are those who are saying it amounts to an evasion, an obfuscation even of the major points.

The company, which admittedly has 1,700 pubs that are free of tie on machines, is rolling out a "royalty-free" AWP machine share option. It's been taken up by 2,200 pubs since being introduced just over two years ago. The deal means tenants receive one third of machine income after VAT and duty is paid.

Boss Ted Tuppen says his licensees like the deal because it derisks machines — there are some sites where licensees earn 100% of the net profit and Enterprise makes a loss. The critics will say that the deal is being signed up for by new tenants who will not know whether they'd have been better off accepting a 50/50 split of profits. And is licensees' income from machines still being rentalised. We just don't know. Here, for the record, is what chief operating office Simon Townsend says: "The royalty-free terms are completely transparent, the lessee can see exactly what the assumptions are, and therefore has all of the necessary information with which to negotiate the overall deal that they feel is right for them."

There will be those who suspect the Enterprise deal is a clever piece of manoeuvring that avoids coughing up in the way Punch has. It's truly high stakes stuff given the degree of scrutiny the issue is under