Landlords sought
Punch Taverns, one of the largest pub operators in Britain has seen its share fall over fears that its business model will not prove sustainable. Already almost one in five of its tenanted public houses is looking for a new licensee.
Punch has 7,560 leased pubs in its estate, spread across the UK. But almost 1,400 of these, around 18 percent of the portfolio, are looking for new tenants. West Yorkshire has more pubs available for potential new tenants than any other part of the country.
On 28 September, The Sunday Times reported that many pub tenants see their businesses suffer from a combination of increased competition from supermarkets selling cheap alcohol, the smoking ban, rises in duty and a general decline in beer drinking. This has prompted some analysts to question whether pub companies such as Punch and Enterprise Inns, are charging too much in rent. Tenanted or leased pub companies make the bulk of their income from charging tenants rent and for beer.
Just over 1,000 of the pubs Punch has available in the UK are being offered by the company. The remainder are tenants who are looking to pass their leases to a new licensee, the newspaper said.
Investors are concerned about the group’s share price. In the past year, shares in the group have fallen by 83.5 percent. On 26 September, they closed at 162 pence, giving the company a market value of GBP 432.5 million. At its 12-month peak in October 2007 the group was worth almost GBP 3 billion. Punch has a net debt of GBP 4.7 billion. Earlier this month the group announced that it would cut its final dividend.
Bankers argued that if Punch cannot pay the annual dividend, which only consumes GBP 40 million to GBP 50 million of cash, the financial headroom at Punch is already pretty tight.
The situation at Punch is made more complex by its financial structure. Most of its income does not go to the parent company but is used to pay interest on bonds raised by Punch several years ago. Key to the Punch’ business model was heavy borrowings secured against future cash flows, which were used to fund a breathtaking acquisition spree. In less than ten years, Punch has taken ownership of more than one in eight of Britain’s 60,000 pubs.
The business model is built on the benefits of scale, a capacity to raise debt and stability of earnings. The growth prospects of the wider industry is of secondary concern.
Punch insists its tenants, on average, make a profit of GBP 36,000 a year. But the figure does not reflect the experience of many individual tenants. Four years ago a trade and industry select committee launched an inquiry into pub tenancies and was told by the Federation of Small Businesses that Punch took almost 70 pence in every pound of profit at its pubs. Based on its own survey, the FSB claimed the average time before a Punch tenant moved on was just three years.
Looks like many tenants have decided that it’s “drinking up time” for them.
