Heineken buys more pubs
It’s a mystery. Why did Heineken agree to buy the 918-strong Galaxy Pub Estate for GBP 412 million (USD 646 million) from Royal Bank of Scotland (RBS) on a cash-and-debt-free basis? The deal was announced in early December 2011.
True, the RBS was bust and needed a series of government bailouts in 2008 and 2009, which left the U.K. government holding an 83 percent stake.
But the pubs did not come cheap. Although the RBS apparently accepted a loss of around GBP 28 million on the sale, which it described as a “good result in a difficult market”, the transaction still values Galaxy at about 7.9 times its 12-month EBITDA.
What is more, Heineken is buying a tenanted pub estate and not a managed pub estate. Tenanted pubs are leased to and operated by third parties. They make up the vast bulk of the UK’s pubs. However, managed pubs, which are run directly by the operating company and generally have greater control on pricing, have fared better during the economic downturn.
As we all know, the UK pub industry has been savaged over the past three years by a combination of the torrid effects of the economic downturn, cut-throat promotional competition by supermarkets, the smoking ban and increases in duties. Outlets are closing at the rate of 25 per week, the British Beer & Pub Association said in March this year.
Before Mrs Thatcher implemented the Beer Orders at the end of the 1980s, which abolished the breweries’ monopoly over beer supplies and forced breweries to sell their huge pub estates, pub retailing was more profitable for the brewers than producing beer.
Today that probably does not hold true any longer. All the UK’s big pub companies are struggling, mostly because of their debt overload, piled up high when these pub companies were gobbled together.
The only reason we can think of why Heineken bought the Galaxy pub estate is securing its beer and cider distribution. If this was really Heineken’s main reason for clinching the deal, it did cost them a lot.
In any case, Heineken, which is the UK’s number one brewer following its purchase of Scottish & Newcastle in 2008, should know what they are getting themselves into. Galaxy’s pubs have been managed by the Scottish & Newcastle Pub Company, now a Heineken subsidiary, since 1999 on behalf of RBS.
Galaxy will be combined with Heineken’s existing portfolio of 462 outlets, bringing the total in the country to 1,380. Following this acquisition, Heineken will become one of the leading pub owners in the UK, operating in the same league as other pub groups such as Mitchells & Butlers, which owns some 1,600 pubs around the UK.
Heineken will fund the purchase with existing cash and credit facilities, according to John-Paul Schuirink, a spokesman for the brewer. The company said on 5 May 2011 it obtained a 2 billion-euro five-year credit line to refinance and back acquisitions.
