It's all change at Punch Taverns. This week's stratgic review contained a few surprises.
There had been speculation that Punch would walk away from 5,500 of its tenanted pubs because of their drain on company cash.
Turns out, that this is far too messy and complicated to be considered. Instead, the company can see a long-term future within Punch for 60% or so of its 5,000 plus tenanted and leased pubs. (Discussions with bondholders are to begin shortly on how Punch can be freed from its securitisation restrictions to sell more leased pubs).
If things go to plan and the bondholders can be brought on-side, it will spend the next few years selling 2,200 pubs that do not generate the kind of cash that provide decent income for both Punch and a tenant.
It's another big boost for the rapidly-expanding freehouse market. I'd expect that more than 75% of the pub freeholds sold by Punch will remain as pubs.
By definition, these will be, as a group, the best quality pubs sold by Punch leased so far.
Many will still be producing quite large amounts of income — it's just that the cake isn't big enough to feed both Punch and a tenant.
Sitting tenants, expanding multiples, gently-renting regional brewers, single-site operators looking to buy a freehold will be interested in having a look at the sites as they come on the market.
Punch will be left with 3,000 tenanted pubs producing around £80,000 per annum in income for the company, arguably the best quality tenanted and leased pubs in the sector.
According to industry norms, the remaining leased and tenanted pubs will provide a theoretical per annum income of around £40,000 for licensees. Punch chief executive Ian Dyson says the focus here will be driving "sustainable growth".
In other words, Punch thinks that it can grow the overall profit cake, alongside licensees, within this smaller, higher quality group of pubs. Meanwhile, Spirit will be de-merged from Punch to create a stand-alone managed business.
Long-term growth prospects
Punch now rightly regards its managed division, now called Spirit again, as having the best long-term growth prospects. It's a rich irony that when former chief executive Giles Thorley snapped Spirit up in 2006 the company was broadly hinting that the deal was an opportunistic one and Punch might not be owning managed pubs for too long.
The deal was largely driven by the relatively cheap chance to add high-quality leased pubs to the top-end of the tenanted business — and the fact that, at the time, managed pubs were buyable for eight times earnings compared to ten times earnings that applied to tenanted pubs.
Now, and at long last, Punch is achieving operational traction within its managed division after many years of under-performance — like-for-like sales have hit 8.6% from a depressed base.
And to overlay irony on irony, Spirit's growth prospects will be underpinned by converting up to 150 of the 700 Spirit pubs converted to leased back to managed as and when the opportunity arises.
To give an example of the profit prospects that Dyson has identified here, one Spirit pub converted to leased is taking just under £40,000 per week.
Lots of others are producing the sort of turnover that is well above average for a managed estate.
Tenants with leases on former Spirit pubs won't have their pubs snatched away, but as they give up their pubs, end their lease agreements or seek to assign, Spirit will be sizeing up the opportunity.
Bondholders
In some ways, the Punch plan is less radical than some were expecting — throwing the keys back to bondholders on 5,500 pubs within its A and B securitisations is not on the agenda.
Nevertheless, much still depends on tricky negotiations with those pesky bondholders. For now, Punch shareholders will see the inherent value within the managed division crystallised (it will be de-merged before the summer), and obtain a "free" punt on the tenanted division.
One wild rumour doing the rounds last week was that Punch had been trying to sell its A and B securitisations — 5,500 pubs tenanted pubs — for £25m. I heard the story twice so took some soundings.
One senior City source poured a bucket of cold water on the notion: "I don't know who the hell would buy it. The two securitisation are worth about a pound — and that's option money. However, it could be a pricing exercise to establish they're worth nothing."
That's the reality within the tenanted division at the moment — it's worth nothing in equity terms for shareholders, but it might be at some point in the future.