Pubpaper 780 – The Trouble with Punch

Posted: 19th October 2014 by santobugtio in Pub Paper, Writing

clients-12-punch_taverns-100When we talk about the large pub companies, one of two always get mentioned, Enterprise Inns or Punch Taverns.   The latter has just its it debt restructuring proposals approved this week, so this week I shall discuss them further, following on from last weeks mention.

Punch Taverns, which deals with leased and tenanted pubs was formed in 2002 after number of acquisitions and mergers over the preceding years.   The group has 3,800 pubs as well as a 50% stake in a leading drinks distributor Matthew Clark.   The managed pub division was spun off from Punch in 2011 and Spirit Pub Company now manages or leases 1200 pubs separate to the larger company (you will recognise their brands such as Chef and Brewer, Fayre and Square and Wacky Warehouse play gyms).

Punch Taverns make their money in 3 ways, sales of beer to the pubs, rent on the property and profit sharing on leisure machines aka fruit machines.  The pubs within Punch are split into 2 divisions, core and non core, the core getting investment “to make each pub the best of its type in its marketplace” with non core being helped to make enough money to make them interesting to other potential buyers in the medium term.  Not that the core pubs were safe from sale, in the year to June 2014, 257 pubs were sold for £91m of which 51 were classed as core.

The company is not one entity however, with 10 sub companies existing within the shell of Punch Taverns, and its shareholders are in the majority hedge funds with one alone owning nearly 20% of the company (pre restructure).  The company has really gone nowhere in the last 4 years, with turnover stagnant and the debt as likely to move as frenchman living next to a brothel (courtesy E. Blackadder).   Overall the company is worth £300m with liabilities of over £3bn.   Revenue is on the decline, as is the operating profit, but if you sell 5% of your pubs, then this is expected.

debt-collection2If the restructuring had fell through, to quote their own documents “The failure of the Restructuring…would be expected to result in…default…which would be likely to result in….the appointment of administrative receivers“.  They were in deep financial trouble. The debt notes by which they raise funds are generally taken out for a set period and interest rate, payable by a certain date.  Imagine a mortgage but with minimum payments every 3 months which won’t cover the full amount and facing a lump sum at the end equal to 70% of the houses value, similar to interest only mortgages which used to be offered by banks.

However if you were in trouble, couldn’t pay the mortgage and asked your banks to hold off any payments for 6 months, you would be evicted and the house sold.  It’s not as easy with a business, if it goes under you are not only losing the value of your holding in the business, but the recoverable assets will only be worth fractions of the value.  That is why when you have £1.6bn of debt notes, your investors give you a bit more flexibility.   Their various debts are due up to 2028, but even then they would owe £716m on these notes still.  The new plan actually involves them paying more off (only leaving £516m), but having longer to pay on the shorter term debt with a payment window at the end of 2014.

But they still list a great number of risks to the business going forward.  Beer sales are declining due to home drinking, health concerns and legal restrictions imposed in 2006 (are they still not factoring in the smoking ban after 8 years of it being in place).   Gambling spending on fruit machines is reducing, people can now bet on sports via their phone apps for a cheaper, longer lasting gambling buzz.  They state the pub trade is seasonal, and this affects money coming in from pubs in wet sales, but this is a known fact across time immemorial.   Competition is cited in the trade, again nothing new since the Roman times.

They also state a potential shortcoming that they may not be able to adjust to customers tastes over time, they have shown slow responses to peoples choices in drink in the past, so there is no reason why it won’t happen again (think about them introducing a “mainstream craft” beer choice for tenanted pubs about a year ago, only 6 years behind the curve).  Finally they warm that they might not be able to execute the plan correctly…well there’s confidence for you.   They recognise that they need to keep their “talented employees”, the same ones who they doubt can pull off the plan.

IMG_9391 blogThey also mention the inability to attract the right quality of tenant, when other companies in the competing sectors may be offering a better deal on rent and drink prices / freedom to buy at best price.   If it is a choice of being shafted on multiple fronts or being treated fairly and allowed to make a living, why go for the shafting unless you are a masochist.  Linked to this is the “risk” of the need to make capital investment in pubs to make them attractive to potential “partners” as they call them.   People don’t pay good money for rubbish, so again is a known part of the business, why can certain pubs charge more for the same product, the perceived quality of the premises and surroundings.

Lastly one of the risks lower down the list is non payment by “pub partners” aka tenants, but this is a rod they have been making for their own back, they charge too much for beer, too much for rent and these two things in combination can drive a pub out of business in double quick time, but only after most struggling landlords have put thousands of private savings into the business to prop it up.   Reasonable rents and beer prices could mean cheaper beer at the retail end and more footfall making up for the lower gross profit.  Just look at Wetherspoons, cheaper food, cheap beer, busy pubs with all sectors of society in attendance.

If Punch don’t have confidence in themselves, why would the tenants, the worry for them has not gone away, but been merely postponed.

(http://www.punchtavernsplc.com/NR/rdonlyres/E6969060-69D3-4838-8E0D-F0AD3A46532A/0/PunchFinalProspectus.pdf)