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.