Punch Taverns: trouble shared, trouble halved?
Never change a running system, that’s what computer scientists usually advise their overly eager customers. Apparently Punch Taverns, Britain’s biggest pub company with a core estate of 6,770 leased and managed pubs, thought the same – and opted for change.
At the end of March 2011, former Marks & Spencer finance director and Punch CEO Ian Dyson, 48, revealed his long-awaited strategic plan to tackle the pubco’s GBP 3.5 billion debt burden. This plan involves breaking up the company into two: Spirits, which will be separately listed on the stock market and will deal with about 900 better-performing managed pubs, and Punch, the underperforming leased pubs division, which will have 5,200 tenanted outlets in its portfolio.
With this plan Punch resorts to a proven strategy. The splitting of the company will remove any linkage of the new managed pub division to the bond debt, thus showing, as some clever market researcher recently noted, remarkable similarities to the “good bank, bad bank” model.
It is also not the first time Punch has opted for this way out. Readers will remember that it was former CEO Giles Thorley, 43, who demerged the managed Spirit Group in March 2002, before floating the tenanted bit as Punch Taverns in May 2002.
Punch built up its debt by making a series of highly-leveraged acquisitions known as securitisation during the credit boom, including the GBP 2.7 billion acquisition of Spirit in 2005. The deal reunited Punch with its old managed pub business.
Apparently, Mr Thorley at least succeeded in making a fortune for himself in between, something his successor will probably be hard pressed to achieve.
In the course of the current restructuring, Mr Dyson wants to sell off 2,200 tenanted pubs in the next five years, at a rate of about 500 a year, leaving Punch with a core of 3,000 pubs. Apparently, tenants will get an option to bid for some of these pubs themselves, which would bring up the number of free houses in the UK. Another option is handing over the keys to the investors.
While the tenants remained comparatively indifferent to this news (probably arguing that their situation cannot get worse under a new owner), bondholders were heavily disappointed. As a spokesperson from ABI Special Committee of the pubco’s bondholders said according to the Publican: “Operational performance in the leased estate, where bondholders have GBP 2.5 billion at risk, has continued to decline. The review does nothing to address this key issue [...], and rather than engage in discussion with bondholders about that now, it prioritises a demerger of Spirit costing GBP 30 million.”
Mr Dyson said he expected "about half" of the group’s GBP 270 million cash pile would be made available to tenanted division after the demerger – an assertion he later clarified was a "guidance", not a firm pledge.
The demerger of the two companies is expected to be completed by the end of this summer.
