Punch Taverns becomes a new type of business: the corporate undead
In May 2012, Punch, which is Britain’s biggest pub operator with some 5,000 pubs, has reportedly started talks to reduce its GBP 2.5 billion (USD 3.9 billion) debt pile, which will lead to an acrimonious battle for control of the company.
According to people familiar with the situation, Punch Taverns has proposed a complex loans-for-equity swap that would allow it to walk away from much of its debt but give creditors a majority stake. The plans are expected to trigger a fight for control between thousands of bondholders, who stand to lose billions, and shareholders, who have already seen the value of their stakes crumble, it was reported.
The company built up the debt in an ambitious expansion drive but its shares have dropped from nearly GBP 14 five years ago to about GBP 0.08 (!) after it was hit by the smoking ban and a fall in trade following the financial crisis. Its market value has shrunk from GBP 3 billion to GBP 53 million (USD 82 million).
Punch last year demerged its managed pubs arm, called Spirit Group, which offloaded 800 sites but left it with most of the debt.
It is now in the middle of a turnaround plan that involves selling its 2,000 worst-performing pubs, and recently said it was on track to close between 400 and 500 outlets this financial year.
Although Punch operates as one company, its debts are split into two complex securitised vehicles, Punch A and Punch B, which have nine and seven different tranches of publicly traded bonds respectively, the Financial Times reported.
The Punch A securitisation is backed by the income stream from about 3,000 pubs, and Punch B by about 2,000.
Both sets of creditors want to break up the company, but Punch argues such a move is impossible because it operates as one company and unpicking its operations - from delivery trucks to the payment system - would be extremely difficult.
Despite the fact that the bonds do not mature for some time, and Punch Taverns is still profitable, Punch is likely to start formal restructuring talks with its creditors after the summer. The Queen’s Jubilee, the Olympics and the European football championship are expected to boost beer sales across the UK. The strength of the sales will likely determine how deep the proposed haircuts on its debt in bonds will be.
Punch’s net debt, at nearly 9 times earnings, is the highest of any listed pub company. This excludes a possible swap liability that could be as high as GBP 300 million, the Financial Times said.
But how did Punch end up having to dismantle the empire it built up after being spun out of Bass in 1997?
In its brief history, it has merged, demerged and re-emerged as one of the army of "zombie companies" - companies like the hotel operator Travelodge or the tour operator Thomas Cook, the food company Premier Foods and the gym chain Fitness First. They all took on too much debt during the carefree expansionist days of the credit boom and now run as fast as they can to keep up with their loans, while having to shelve necessary investments to satisfy creditors, the Sunday Times commented on 27 May 2012.
Theirs is another modern economic morality tale, with deep echoes of what happened to the banks.
Actually, they operated like banks. Greg Mulholland, a Lib Dem MP said in January 2012: “The business model of the pub companies has been akin to the banks. They overvalued their estates, borrowed vast amounts of money against that and when the property market collapsed, they found their ludicrous valuations were wrong and they suddenly found themselves billions of pounds in debt."
Readers will remember that The Royal Bank of Scotland, which is now state-owned after receiving the largest bank bailout in the world in 2008, was at one stage one of the largest pub owners in Britain with 918 pubs. The bank acquired its pubs from brewer Scottish & Newcastle over a decade ago and turned this portfolio into a leasing business. In December 2011 it was forced to sell them to Heineken for GBP 412 million (USD 635 million) to reduce debt.
Punch, The Royal Bank of Scotland ... the machinations of the financial joy-riders in the pub industry have left almost all the pub companies with balance sheet gearing much higher than real estate developers or cyclical retailers, the two industries they most resemble.
"A decade ago, Whitbread, a big, old established brewer and pub operator, switched its entire business into hotels and restaurants. Its pub chain was bought by a pub company, Enterprise Inns. Today Whitbread has a market value of GBP 3 billion, book equity of GBP 1.2 billion and net debt of GBP 500 million. Enterprise stands that on its head: net debt GBP 3.1 billion, equity GBP 1.4 billion and market value GBP 175 million," the Financial Times wrote a few weeks ago.
To put that in perspective: more than 20 percent of Britain's 52,000-odd pubs are owned by two companies, Enterprise and Punch Taverns. Their combined debt is GBP 5.4 billion and their market value GBP 250 million, reports say. That means that a large part of the country's pub estate is a commercial disaster zone.
The trouble is that the distressed pub companies are trying to service their debts by taking more and more from the turnover of their tied pubs. Nearly 29,000 of all pubs in Britain are tied, which forces them to pay high rents and excessive beer prices to the pub companies. Mr Mulholland, MP said: "In the past if a pub owner was tied he paid more for the beer, but received a discounted rent. What has happened is the pub companies have increasingly put the rents and beer prices up.” As a consequence, pub landlords have been forced out of business and many pubs - an average of 16 pubs a week in the six months until the end of December 2011- have closed for ever. In 2009, research commissioned by the House of Commons business select committee found that 67 percent of tied publicans earned less than GBP 15,000 a year (USD 23,000).
What's the government doing about this? Err, nothing. In February 2012 the business minister Norman Lamb said that the government will not establish an independent review panel to scrutinise the relationship between pub companies and their tenants. This was a slap in the face of MPs, a majority of whom had voted in January 2012 for this review panel to be set up.
