Analyst: M&A set to return to pub sector
A leading City analyst has claimed a wave of new senior management in the pub sector could lead to a resurgence of Mergers & Acquisitions (M&A) in the industry.
Geof Collyer of Deutsche Bank in a note entitled "M&A - optionality breeds content" has argued that new arrivals at Mitchells & Butlers (M&B), including the imminent appearance of new chief executives at Whitbread and Punch Taverns will provide "further catalysts" to changes in the sector.
He said possible future deals could include the revival of M&B interest in Punch's managed estate, its possible interest in The Restaurant Group as a springboard to a leisure park estate and a potential move by Whitbread to own all the pubs co-located with a Premier Inn.
Greene King and JD Wetherspoon could also be interested in M&A, he added. Collyer said: "The past two years have been an extraordinarily quiet period for M&A activity for a sector, which has been very actively consolidating for around twenty years.
"This note looks at the potential for a number of different and varied proposals that could see a return to significant deal flow in the managed house arena over the next twelve months, not many of which would require companies to raise new financing.
"We see new blood coming into the sector as providing further catalysts for change in group structures. We believe that this will speed up the process of managed pub consolidation and provide further opportunities to create value for investors.
"We have maintained our buy recommendations on Greene King, Mitchells & Butlers and Whitbread, and believe that these three will feature prominently in the forthcoming action."
The Deutsche Bank analyst says there have been 22 deals worth just £500m since 2008 — but if the Globe acquisition by Heineken is excluded — the figure is £330m.
Punch managed pubs
Commenting on the possible resurrection of interest in Punch's managed division by M&B, which saw the arrival of a new chairman earlier this year, Collyer described it as a "still live consideration".
But he warned it would need additional capital to acquire and invest in and added: "We see the Punch managed estate as much less interesting in its entirety now then when M&B first looked at it in May 2003.
"On top of which, there are now a considerable number of reversionary leases within the portfolio (pubs that had gone bust / been placed into administration by companies that had bought them off either Punch or Spirit) which dilutes the quality.
"We would be surprised if more than half of the current portfolio would fit M&B's acquisition criteria now.
"It may well be that M&B would only be interested in a much smaller proportion of the estate. However, with a new CEO coming in at Punch, a deal could be reignited."
He also hinted at the possible disposal by M&B of 300 mostly wet-led unbranded sites, which in their entirety could fetch between £300m and £500m, depending on the
freehold/leasehold mix. Referring to the recent review by M&B, Collyer said that, "the timing of trying to develop smaller sized version that would work on leisure and retail parks could take some years to enacts successfully — and meaningfully" and added that a tie up with The Restaurant Group (TRG) would be a better development.
However, such a move funded by an all-share deal could draw M&B shareholder dissent and TRG might not be willing sellers.
