Thursday, 20 September 2012

Up to Their Neck in Debt


I've written before about the Pub Companies. The big ones at least, are not ones that most would reckon to be the landlord's friend. Nor indeed the drinker's friend. I know they give all that guff out about how their interests and those of their licensees are identical, but what they never mention is that they are up to their eyes in debt. That makes the relationship more akin to a starving man to a man with a large pie. The starving man needs to get that pie to live and he will do so at all costs.

Back in 1989, when the Beer Orders came in, the existing large breweries were to be limited to a couple of thousand pubs.* It wasn't anticipated that rather than go along with this, sell off the excess and compete for business, that they'd side step the arrangements by setting up Pub Companies and thus defeat the whole point of the new legislation. What isn't always appreciated is that to raise the money, the new Pub Companies took out loans or mortgages on the pubs, most of which were debt free, having been acquired by the big breweries long since and the loans paid off likewise. Every time a merger took place of  Pub Companies it was paid for by borrowing to pay off those that had borrowed to set it all up in the first place. It explains why the Pub Companies are, not to put too fine a point on it, sinking under a sea of debt.

The Sunday Times had an excellent article on this last Sunday, in which they explain that the sharks are circling around one of the biggest, Punch Taverns. This is a company with a share base worth £41 million and owes a staggering £2.3 billion - 56 times its worth. It owns around 5000 pubs, which in turn are mortgaged to an average of £460,000 each. Any wonder then that they squeeze their landlords until the pips squeak? These pubs are mostly tenanted (some leased) and in an effort to reduce the debt further, the aim is to sell off another 2000 pubs. Isn't it ironic that these estates are being brought down to a sensible level now after creating giants that have devastated the industry? Rather like the Beer Orders intended - the numbers that is - not the devastation.

So good news? Yes and no. There is already a lot of pubs available at a time when the market is weak, the economy flat lining and demand for pubs sluggish at best. The pick of the crop is either in the floated off Spirit Group (the managed house arm which has become a separate company - again!), being held back against a rainy day (it is pissing down at the moment and everything is effectively for sale), or have been sold off already. Don't look for good news soon I'd say.

Oh and what of the circling sharks. When blood is scented they appear in numbers. Vulture funds have hoovered up around half of the companies shares to be in a position to strike when it all goes tits up.Who knows what will happen then? It could go either way, but will it be good for pubs and drinkers or bad?

Time will tell, but it looks like we might find out about Punch sooner rather than later.

I've written previously about Pub Companies - none of it particularly positively I'm sorry to say. Click here for details.  

* See John Clarke's very important comment too, as areminder it could have all been very different.

15 comments:

Nick Boley said...

You have hit the nail squarely on the head - again. Punch are certainly the worst of a bad bunch and I have heard too many stories about how they operate in my area, including refusing to repair toilets or car parks (safety issues) and asking the tenant to do so. He wouldn't, and has walked, so Punch is now doing all this and more (whilst the range of beers is being drasticaly cut).
The Pubcos are doing AT LEAST as much harm to pubs and drinkers as George Osborne and the big supermarkets.
I have suggested previously - and will do so again here if you will permit me - that CAMRA must invite chairman of pubcos and supermarkets, and treasury ministers to future AGMS to present their policies, listen to us and have a debate. That would be worth attending. First up, chairman or CEO of Punch Taverns.

RedNev said...

Only one thing I'd disagree with: I believe the government did anticipate the rise of pubcos. I remember at the time asking people what would happen to all these surplus pubs. The view expressed by the government, and believed by an utterly naive CAMRA, was that we'd see a massive increase in the number of free houses. Having had relatives in the business, I just couldn't see that. Not being a business expert, I didn't see the pubcos rising either, but I believe the government did, because if any political party knows about business, it's the Tories, and I doubt they resist a chance to allow some of their mates to get rich.

Other than that, I agree with your post completely.

Curmudgeon said...

Was it not to some extent rather naively imagined that the Big Six would hive off breweries together with tied estates of pubs (rather like what happened to Ushers)?

Tandleman said...

Nev: You may be right, but I rather think that was lower down the list of possible outcome.

Mudgie: I think that was one hope, just selling a lot of pubs another. I wonder what would have happened if they'd set the limit at 4000 or so?

Meer For Beer said...

Punch are currently advertising in my local area for tenants
/managers. The is only one as far as I am aware in it which is the pub that has the sign up. Says a lot really.

Tandleman said...

Can you run that last sentence past me again?

Phil said...

I'm trying to follow the economics - are you saying that the pubcos (set up by the breweries) borrowed money to buy the pubs from the breweries, then secured the debt on the pubs? So we went from "brewery owns pubs outright" to "pubco owns pubs with massive mortgages and sweats tenants to pay them off" plus "brewery has money"?

If so, what a mess.

Tandleman said...

That is exactly what happened. Of course when it happened, pubs were full to bursting, so it looked a one way bet.

In fact it didn't start out so bad - bad enough but manageable as inital loans were quite small relative to what the pubs were worth - but each time they just increased the borrowings for acquisitions and mergers. Money was then taken out of the trade and replaced by more borrowings. It made a lot of people rich. Not pub tenants of course. Or drinkers.

A mess indeed. If I had the time, I'd write a book about it.

John Clarke said...

It's worth remembering that the Beer Orders as enacted did not put any sort of ceiling on pub ownership - this is a myth that is starting to be accepted as fact. All they did was place a limit on those that could be tied - half the excess over 2,000.

Tandleman said...

That's a very good point John. I'd certainly forgotten about it.

Bet they wouldn't set up PubCos now.

David Mayhall/All Gates Brewery said...

They have been surviving by the skin of their teeth for two+ years - This is what i said in January 2011! on the subject.
http://allgatesbrewery.com/allgates-brewery-blog/2011/01/punch-taverns-now-get-me-two-pencils-and-a-pair-of-underpants/

Cooking Lager said...

In all the "debt is bad" crap that is repeated ad nauseum, debt is no more than a financial tool and you choose the capital structure that most benefits the owners of a business.

If debt is cheaper than equity it makes sense to expand with debt and benefit the equity holders. When debt gets expensive it is time to restructure and turn the debt to equity.

The problem isn't the capital structure, the problem is the fundementals of the business, trading, is unsound. This makes the debt expensive through risk and equity undesirable to hold.

The screwing of the business to meet interest payments is a result of unsound trading.

A different capital structure based on equity may have given more breathing space as dividends can be reduced, where interest payments cannot, but this would have seen a fall in equity prices.

As equity prices fell the equity holders and equity market would have demanded better use be put to the assets of the business, ensuring just as many pub closures.

It was the business trading not the capital structure, wot dun it.

Tandleman said...

I think I said it better.

Phil said...

Debt's not bad, but "debt's not bad, so let's create a business out of nothing and run it on debt" probably is.

Curmudgeon said...

Being heavily leveraged with debt makes a company much more vulnerable to a downturn in trade. Not a good idea in a declining sector...