Following Mitchells & Butlers' (M&B) sale of 333 premises for £373m to TDR Capital, the inevitable question is whether this is the beginning of things to come for the licensed trade sector? If this is the start of a new interest in licensed trade from private equity, then a wider consolidation of what is currently a relatively fragmented sector is a distinct possibility.
A large-scale return of acquisition activity within the industry will always bring with it a material shift in the landscape of pubs and franchises across the country, but what exactly will these prospective private equity buyers be taking on for their money?
The level of buyouts dropped drastically in the sector during the recession, as general economic uncertainty put off, or indeed finished off, a wide range of potential acquisitions, despite many funds sitting on a great deal of accumulated investment capital. In fact M&B's decision to sell its wet-led venues is the first real sign of industry-wide consolidation for more than three years.
However, with price/earnings ratios coming down and asset prices looking substantially more attractive, we could be reaching a tipping-point. The money is still there. Aside from the fundamental price of these assets, there is also greater opportunity to bolt-on other businesses to achieve synergies and economies of scale.
Indeed, the opportunity to consolidate by bringing together not only operations in the licensed trade sector but also holdings in other related industries is certainly appealing to private equity investors. Also increasing the attraction of sector investment at present is the real opportunity for gaining competitive advantage by upgrading premises, with many mid-sized pubcos simply rebuilding the balance sheet post-recession. For those investors with deep pockets there is a good chance to create the 'next big thing' on the high street.
However, there are risks. The flipside to upgrade opportunities is the cost of ongoing investment, which is one of the main barriers to entry for equity investment in the licensed trade. The wet-led high street market necessitates a high capital spend and frequent refurbishments to keep sites competitive, and the landscape can change very quickly as fashions change. This means that in a practical operational sense debt levels need to remain sensible, and leverage should be kept relatively low to create the headroom necessary to allow for peaks or troughs in trading that may occur. Again, only deep-pocketed investors need apply.
There are also some fund-amentals which remain in the market that may appear shaky from an outside investment point of view. Market issues including over-rented sites, price wars, increasing legislative burdens and falling beer volumes all have an effect on potential ventures into the sector. A clearer path laid down by the resolution of any of these issues will likely draw more attention to the potential of the licensed trade industry.
Moving forward through the recovery, it is clear that many businesses are actively exploring a wide range of more dynamic options, including shedding assets, merging, expansion and acquisition from both within the sector, and from an outside investment viewpoint. Concurrently, businesses are now also exploring refinancing as the licensed trade looks more optimistically towards the future, and with a resurgence in interest from private equity, there are positive signs that the industry is readying itself for improving fortunes.
Bianca Dexter-Burnell is head of licensed trade at Barclays Corporate