Analysis: Payne set to lead consolidation move

Stonegate Pub Company, the buyer of M&B's 333 wet-led pubs, will be chaired by industry veteran Ian Payne — and industry consolidation is on the cards. Below, Mark Stretton considers what lies ahead for the new-start operator.

Over the weekend Ian Payne was re-acquainting himself with a bunch of pubs he used to look after 20 years ago as a senior manager at Bass.

He has come home (or the pubs have) after it emerged last Friday that he was leading the purchase of 333 pubs from Mitchells & Butlers in a deal backed by TDR Capital and valued at £373m.

A good chunk of the pubs, such as the Sack of Potatoes at Aston, Birmingham, used to operate as tenancies, run by Payne, before the Beer Orders necessitated the transfer of the best such pubs to managed houses.

That a private equity player has returned to the market, establishing a new vehicle called Stonegate Pub Company, took most people by surprise.

And this is not just any such private equity firm, but one that is an experienced leisure investor having in the past backed Pizza Express and the original Punch business when it was formed out of Bass in 1998.

For further context, it's worth noting that this is the biggest deal in the eating and drinking out market since 2006 — when GI Partners bought 300 pub-restaurants from Punch for £571m to form Orchid and Mitchells & Butlers bought 239 pub-restaurants from Whitbread for just shy of £500m.

TDR, which has apparently have been looking at a wide variety of leisure businesses for up to the past year, is clearly now comfortable with where profit multiples currently reside, and obviously sees an opportunity to make money in the wet-led high street pub and bar market.

Lots of the detail is yet to emerge, and the deal does not complete until November, but it will see quite a few M&B employees transferring across to a new business. M&B will provide transitional services until Payne and TDR can establish their own central support functions.

Bolt on​

The really interesting question is what other businesses might be bolted on to Stonegate? It is clear that the next step is to prise away the Town & City Pub Company business — the other pub group he chairs — from its current owners Kaupthing and Commerzbank, to form a business that with close to 600 outlets would be have a high street presence second only to JD Wetherspoon.

The T&C deal would also provide Payne with the senior management that he currently does not have. Perhaps such a deal will also include the La Tasca business too?

Kaupthing and Commerzbank are not unwilling sellers. In the interim period, it will be interesting to see if Payne continues to chair both Stonegate and Town & City.

The 333-strong pub package that has been acquired comprises 52 Scream bars, 71 music bars and late-night venues, 75 unbranded town pubs, 67 community pubs and 68 other small pubs. The estate is 20% leasehold. The pubs generate annual sales of £329m and ebitda of £52m, which means the disposal represents an ebitda multiple of 7.2 times.

Too good an opportunity​

Payne sees big opportunity in the Scream brand, one of only two student-focused businesses in the market alongside Varsity, which M&B has not really focused on or invested in, in recent times.

He also likes the look of Lakota, a style bar that M&B has grown to about a dozen sites. The nightclub bit, which comprises Flares, Reflex and Popworld and throws off a lot of cash, will be placed into a separate division, and there is a sense that this may or may not form a part of Payne and TDR's long-term thinking.

As for M&B, the deal is another big tick in the box. The company has now raised around £500m in disposing of this business plus Innkeeper's Lodge, Hollywood Bowl and other non-core bits and pieces, the cash from which will be injected in to its six growth brands in effort to capitalise on its food expertise.

It will be left with an estate of 1,580 pubs, with (according to Panmure Gordon) average ebitda of £240,000. However the key story here is the return of a highly competent private equity firm aided and abetted by one of the sector's most seasoned campaigners.

"I love the business, I love working, I love running big pub companies," Payne says. "This was just too good an opportunity to miss. The plan is to become a dominant force on the high street."