Last week Giles Thorley revealed he was leaving Punch Taverns later this year. The PMA Team gives a view on the departure.
It's been pretty much a game of two halves during Giles Thorley's nine years at the helm of Punch Taverns. Between the end of 2001, when he became Punch executive chairman, and the end of 2007 the story was upward and onward.
The company grew from a few thousand pubs to around 9,500 by 2006. The consummate deal-maker, Thorley vacuumed up acquisition after acquisition, with the estates of InnSpired, Pubmaster and Avebury Taverns bulking out his tenanted division.
Then in 2006, against the odds, he acquired the Spirit managed business (beating the acquisitive Robert Tchenguiz's R20) and later added another sizeable managed plum, Mill House Inns. Just to confound those trying to second guess the strategy, he even bought a stake in the Matthew Clark wholesale business. The heady whirl of acquisitions and expanding earnings, financed by securitisations, gave him a golden halo in investors' eyes.
The Punch share price rose from 230p each on flotation in May 2002 to almost £14 in early 2007, as the market grew feverish about the potential of a Real Estate Investment Trust conversion adding tax-free earnings to the Punch cake.
The past two and a half years have been as torrid a time as can be imagined. Everything that could have gone wrong has.
The market turned against companies with large debts and property assets with an uncertain value — Punch's share price also suffered from a securitisation structure that favours bond-holders over shareholders in extreme conditions.
The smoking ban hit more of Punch's leased pubs harder than any could have imagined and the recession, when it arrived shortly afterwards, doubled the effect. The double hammer blow has resulted in a staggering 20% drop in leased income over two years. The past couple of years have been about an almighty struggle to catch up with new realities — bring down debt, sell non-viable pubs, replace the property-minded culture with an operations-focused one.
Ahead of the game
To its credit, Punch Taverns was ahead of the game in terms of the new era of honesty and straight-forwardness required in the tenanted pub sector. Even before the Business & Enterprise Select Committee fired torpedoes at the big tenanted companies in May 2009, Punch had come clean — new division boss Roger Whiteside admitted it needed to act with greater transparency to create the trust with tenants that was missing.
Those who know Thorley and worked with him tell me he has been utterly consistent over the years in an honest desire to create a mutually beneficial relationship with tenants. But there's no doubt that Punch pushed the income levers in the boom years pretty hard, regardless of the rhetoric of the time.
Giles Thorley's resignation does not come as a bolt out of the blue. A full three years ago he was making it clear that he would leave within a year. The surprise was that he changed his mind and stuck it out for another two and half years.
Had he gone in early 2008, of course, he'd have side-stepped the approaching storm (and be even richer than he is, had he cashed in his remaining share options near the top of the curve). He stuck around, I genuinely believe, out of a desire to do his duty and deal with the fall-out that was coming.
His reason for leaving now is that he believes he's not the right person to lead the operations-focused approach that the company needs going forward. This view is an honest admission about Punch's past and future. The weakest part of his skill set relates to operations. He is, in fact, the last member of the boom years executive team to leave Punch (Jonathan Paveley, Adrian Fawcett, Robert McDonald, Frances Patton, Deborah Kemp and Andrew Knight have all left in the past few years).
What was consistently missing at Punch were executive directors on the leased side who had original and workable ideas about how the division could be developed in a way that grew site-by-site profit for licensees. Tenanted pub estates are relatively easy to run when the going is reasonably good. But at some stage, it was beholden on somebody at Punch to work out what would happen to the estate as the anticipated beer-volume declines occurred.
Mike Tye
For observers like myself, the lack of genuine entrepreneurial drive was unfathomable. Likewise, in his managed division, Thorley was slow to understand that it needed a serious operational overhaul. A couple of years were spent selling pubs and converting sites to lease, while the core estate saw little attention. In 2008, Thorley was talking about out-performing through innovation at Spirit and how the Olympics in 2012 would prove transformational — it was proper away-with-the-fairies stuff given the actual state of play at Spirit.
A year later, new division boss Mike Tye is setting forth an urgent action plan for 600 refurbishments and a host of new brands. It's a testament to the fundamental strength of the business model that Thorley has put together at Punch — and his deftness — that the company has ridden out the past two years.
He's also put in place two division chiefs, Roger Whiteside and Mike Tye, who are taking the steps needed to prepare Punch for its next phase. There are still daunting challenges ahead for both divisions. Only recently Whiteside was explaining that Punch leased will eventually consist of just 5,000 pubs — and many of these still present an operational challenge.
Meanwhile, Tye is, by my estimate, around one sixth of the way through a 600-pub overhaul that has at least a couple of years to run. But it's to Thorley's credit that he has instigated a root-and-branch shift at Punch to a focus on organic, sustainable, retail-led growth. (The monumental decision to impose just a 1% wholesale price increase within the tenanted estate this year is a hugely symbolic and practical sign of this — and an absolute assurance that Punch means what it says about the way it plans to behave.)
Part and parcel of the changes that come with this new era, though, is his departure.
What the analysts say
Nigel Parson, Evolution Securities: "The timing of Thorley's departure is a surprise, but a necessary part of the rehabilitation of Punch Taverns. He has done enough to show a way out of the mess that Punch is in and the new chief executive can continue the reshaping of the business without the baggage that consumed Giles in the end. The new man can take a dispassionate view of the future of Spirit, for example. We think there's sufficient value within the business to persevere with our buy recommendation (based on the value of the assets), despite the challenges that still remain ahead. We have always argued that issues are concentrated in the tail estates of the tenanted operators and that disposal/recycling capital into debt is the recovery strategy."
Greg Feehely and Wayne Brown, Altium Securities: "The group has a significant amount of work to do to reposition its estate and address the continued weakness that faces its tenanted business. While the business has concluded a significant number of disposals during the past 12 months, enabling it to upstream cash to the plc, we feel this will have to continue in combination with a trading recovery in both its tenanted and Spirit managed estate to see a recovery in the group's profitability and, more importantly, cash flows. We are not changing our recommendation today and feel that better value exists in the licensed on-trade. We will revisit our forecasts at the time of the interims on 22 April, but feel that risks are on the downside."
Mark Brumby, Langton Capital: "Mr Thorley's decision to step down is a surprise, but not a shock. He has occupied the position of CEO for nine years, probably twice the average tenure of a chief executive in the top flight, and his departure is amicable and would appear to have been managed, behind the scenes, for several months. In response to the credit crunch and subseq