Tuesday, 20 August 2019

Greene King Takeover

https://d2q79iu7y748jz.cloudfront.net/s/_squarelogo/036833a63395c517e650aaba9dd88400I've been busy with the Great British Beer Festival and with editing (writing) my local CAMRA Magazine, so haven't had time to blog, but I couldn't help but quickly jot down one or two thoughts about Greene King being taken over by Hong Kong conglomerate CK Asset Holdings for £4.6 billion, including its debt. The Hong Kong company is offering 850 pence per share, a 51% premium to Greene King's closing stock price on Friday.

So there bare facts are that a successful business has bid a premium for another successful business. You know what? That happens all the time. Most businesses don't grow organically, or rather they do, but only to the point that become interesting or successful enough to either take someone else over, or be taken over. It is very much a dog eats dog situation. And a normal one, though in this case exacerbated by the weak pound which makes British owned asets relatively cheap.

There has been a muted reaction to this in the Twittersphere and elsewhere on social media. Roger Protz has been the foremost tweeter with this:
In response, Martyn Cornell hits the nail on the head:

So there we have it. As Greene King carries little emotional attachment in the mind of most beer drinkers, it was always unlikely that its takeover would have beer fans rushing to man the barricades. That's just how it is, but wait.  Greene King is a big part of the British brewing industry. It owns a large number of pubs - over 2,700 - and these are spread all over the country. Heck we even have plenty of them here in Greater Manchester where, one must admit, they aren't exactly the most popular beerwise.  Their type of beer is not always particularly suitable to local tastes. (See also post below.)

Concerns are, as always in these circumstances, around what the new owner intends to do with its new acquisition. Pubs, by their nature, can be turned into easily realisable cash, by selling them for different use, or for the land they occupy. That though is an ongoing issue as social habits change and custom becomes less, though there are signs that this is bottoming out to some extent.

According to their statements, "CKA's strategy is to look for businesses with stable and resilient characteristics and strong cash flow generating capabilities," said George Colin Magnus, chairman designate of the CKA unit in charge of the acquisition. "The UK pub and brewing sector shares these characteristics."

So, on the face of it, they want the business to continue to generate cash. They have given an assurance along the lines of business as usual (see here for more).  Can we trust this? Doubtful, but the selling off of assets would, where seen as appropriate, have likely happened under current GK management anyway. It is an uncomfortable fact that many pubs are worth far more to the owners as anything but pubs.

So where does that leave us? A largely unloved vertically integrated pub and brewing business has been taken over by someone else who wants to make money out of it. Yes assets will be sold to pay for the purchase. Will vertical integration continue? Tricky one, but the takeover recommendation gives a strong indication that the brewing side will continue.

Nonetheless we will have to wait and see how this one plays out.

Seems CKA already own a number of freehold pubs which are leased to Greene King

The fact that Greene King owns the freehold or long leases on 81% of its pubs, certainly shows the PubCo model with its huge debt, to be a millstone round the neck of the pub industry.  

As this is a cash offer, we can assume that CKA have reserves that need to be wisely used.


Curmudgeon said...

Yes, hard to know exactly what to say about this one. I can't see that many people are going to be manning the barricades, but I'd say their beers are considerably better than often given credit for.

In the longer term it's very hard to see it remaining as an integrated brewer and pub operator, so it's likely to be a further blow to that business model.

Marston's aren't exactly comparable as they've made a much bigger investment in hoovering up beer brands from other companies.

ElectricPics said...

Marstons have enormous free trade and area proper beer company - their brewing division accounts for 33% of their entire revenue of £1140M. GK on the other hand, is a bigger business but Brewing and Brands only accounts for slightly less than 10% of overall revenue of £2177m. A selloff of the breweries and brands would certainly seem on the cards. Hopefully the Belhaven management will already be chatting to financiers.

Tandleman said...

I agree with both sets of comments. Marstons and GK are superficially similar, butt have different business models and, as EP says different revenues.

An estate of 2700 requires a lot of servicing though, so I wouldn't rule out the brewery continuing. As for belhaven, that is a fair point.

Cooking Lager said...

You seemed concerned on Twitter at the lack of people that seemed to care regarding the fate of Greene King.

I want to assure you, TAND, that I care passionately about a company that make beer I never drink and provide pubs I never go in. It matters because it matters to you.

ElectricPics said...

On the face of it servicing an estate of 2700 could be a monumental logistical task without a brewery but most of GK's own beers are relatively low volume with only IPA being produced in really big volumes. The high volume draught products they sell are Carlsberg and John Smiths and they also sell them into the free trade. Either way, I'd say the main brewery could be sold off with a guaranteed supply deal although Heineken, ABInbev, Coors and I dare say Marstons would (will?) be hovering like vultures over all those pubs.

Malcolm Nicholls said...

The new owners will surely pull out of the free trade which y low margin for them. I suspect they will look to sell the brewery rather than close it, at least as the first option.
Wither Wetherspoons and their cheap supply of Abnot and Ruddles??

Ben Viveur said...

If this were Marston's there would be plenty of scope for individual brewing sites to regain their independence. The difference/problem with GK is that they closed almost all the breweries they took over and in most cases ditched the brands or ran them into the ground. There's little scope for any sort of operations break-up here that would actually be good news for drinkers.

Bobby Mango said...

At least they weren't taken over by 'big beer' and are thus still 'craft' ;-)

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Stono said...

I didn't agree with Martyns comment on twitter,for me I thought Rogers's piece he wrote summed it correctly,and highlighted there was just a little too much of the 'we dont like their boring brown beer, so what' from the commentariat.

I care, I care alot, for the publicans faced with another upheaval and possible rationalisation,the brewery workers now facing an uncertain future, and the local farmers who provide Westgate brewery with the raw ingredients and our their only customer. If you live in Suffolk for any length of time you'll end up knowing people from nearly all 3 of those walks of life, some you may even end up being friends with.

Suffolk is very much part of the DNA of GK and GK is very much part of the fabric of Suffolk. Suffolk cares alot.

Tandleman said...

Good points Stono.

Andrew said...

CKA Group has been a good owner of 3 Mobile and Superdrug so that's some consolation.

Having a brewing arm is a differentiator so I wouldn't rule out the current business model being retained. However, if someone like China Resources Snow Breweries made CKA an offer, they may find a more willing brewery seller in CKA than when it was Greene King plc.

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