Triumph and tragedy in the tenanted trade

It could be called the triumph and the tragedy of the multiples. The sale of Realpubs to Greene King last week for £52m is a great example of how well the tenanted model can work for entrepreneurs.

Founders Nick Pring and Malcolm Heap, a pair of former Whitbread executives, invested a combined £35,000 in their first Enterprise leased pub. A decade or so on the pair have made an estimated £15m profit selling 14 pubs to the Suffolk brewer and retailer.

Last year, Pring attended our Tenanted Pub Company Summit with a brief to talk about the strengths and weaknesses of the tenanted model. In the event, he was full of praise for the low-cost opportunities the model had afforded the pair to operate quality pubs — and make a lot of money by transforming the earnings at uninvested pubs in often unglamorous parts of London. And there was very little in the way of criticism for the tenanted companies that had let Realpubs its sites.

The story is similar for Rupert and Jo Clevely at Geronimo Inns, who made a start with tenanted pubs. Just before Christmas, they saw the fruits of their labour — an estimated £8m personal profit on the sale of the estate to London-based Young's. And this isn't only a London story.

There are examples from all over the country of individuals doing very well, courtesy of the opportunity provided by the tenanted business model. But there is a more depressing theme for the shareholders of the large tenanted companies.

As multiple operators expand their estates of pubs there invariably comes a dawning realisation. To be masters of their own destiny, to avoid being "overwhelmed by the superior forces of their landlord" (to use Wetherspoon founder Tim Martin's memorable phrase), to maximise the value of their business, they need to buy in their freeholds.

For Realpubs (and many other multiples),

the relative financial distress of their landlord has provided the opportunity to marry the value of their lease with the value of the freehold to create lots more equity value

within their company.

For the tenanted pub companies (and shareholders), it's the tragedy of the multiples. Two decades after the Beer Orders, their universe should look very different. It ought to be like the world of Domino's Pizza, where there is a well-developed network of 133 multi-site franchisees making strong profit and around for the long term.

In the tenanted world, major companies have failed to identify and develop their best multi-site operators in this way. Many that remain will offer up a long list of the failings in the relationship.

The essence of the tragedy is about skills leakage, the loss of top-class retailing skill from the tenanted sector.

In the specific case of Realpubs, for example, Greene King is smart enough to understand the potential of spreading the founders' skills to 20 or 30 of its pubs. Imagine how many Enterprise pubs could have benefited from Pring and Heap's skills if a more strategic approach had been adopted.