Fears for the future of British pubs resurfaced this week as another major pub operator revealed plans to change hands.
After Fullers sold its brewing business to Japanese firm Asahi for £250million, and Stonegate agreed to buy EIG (formerly Enterprise Inns), now it’s pubs giant Greene King in the spotlight.
The firm has secured an equivalent £2.7billion offer from CK Noble – an offshoot of the property company owned by Hong Kong’s richest man Li Ka-shing.
Ker-ching: Greene King secured an equivalent £2.7bn offer from CK Noble – Li Ka-shing’s firm
In addition to the obvious that, if successful, the deal will see another London-listed firm leave the stock exchange, the scale of the acquisition means it will likely have implications for the British pubs trade.
For patient shareholders, it’s payday. Investors raised a glass to the news as the stock rocketed by more than 50 per cent after the Greene King board recommended the all-cash bid.
Analysts expect investors to strongly get behind the move, predominately because the offer tabled by the property tycoon represents a 51 per cent premium to the stock’s previous closing price.
Chart shows Greene King shares over the last 52 weeks, spiking when the deal was announced
That gives shareholders a price not seen since the Brexit vote. Sentiment around UK shares, particularly in the retail and leisure sectors, remains subdued owing to the immediate risks.
‘We think it should be viewed as attractive by shareholders given the premium offered and the uncertain UK consumer and economic outlook,’ says Anna Barnfather, an analyst at Liberum.
Greene King’s former boss Rooney Anand is said to be about to pocket £10million as a result of the takeover as the boss of 14 years still holds 1.1million shares in the pub chain. The acquisition should also allow the 24.4p dividend to be paid out.
Another selling point for Greene King is the promise that the company’s existing management team will remain in place, so the top brass can cash out without handing over the reigns.
What’s in it for CK?
The deal is a good one from CK’s point of view too – even at the whacking great premium – because the cash-rich firm is playing ‘the long game’.
The weak pound on the back of the Brexit vote and low cost of borrowing means it’s a better time than ever to scoop up a British bargain.
The pound, which struck a 10-year low against the euro earlier this month, is currently betraying traders’ fears of a disorderly Brexit and proving an allure to international investors.
The Suffolk-based firm operates more than 2,700 pubs, bars and restaurants
Since the EU referendum, British microchip maker Arm Holdings, Cathedral City maker Dairy Crest, Alton Towers owner Merlin Entertainment and Telford Homes have all fallen into foreign hands – typifying the UK’s cheap post-Brexit assets.
Companies that are of particular appeal seem to be those with infrastructure assets. Property, and lots of it.
And this deal is no different, as the 220 year-old Greene King owns the freehold on 81 per cent of its pubs.
The Suffolk-based firm operates more than 2,700 pubs, bars and restaurants and makes the Old Speckled, Abbot Ale and Green King IPA beers at its two breweries. It also oversees the Hungry Horse, Chef & Brewer and Farmhouse Inns chains.
Indeed, a recent revaluation of its property portfolio indicated a market value of £4.5billion against the £3.5billion book value.
Of course, as Canaccord analyst Nigel Parson points out, ‘when the pound is weak your absolute price drops, but so does your profitability’.
‘Still, Ka-Shing knows the business well as his firm already owns some of the pubs,’ Parson adds, ‘and it would appear that he’s in this for the long run.’
So for the Hong Kong tycoon, the top-heavy price for Greene King will no doubt pay off later down the line, particularly as and when the pound returns to its former glory.
CK, which owns Superdrug and the mobile network Three in the UK too, also seems eager to grow its stake in the UK pub sector, as pubs and bars prove more resilient than casual dining.
‘CK is particularly confident of the long-term importance of the pub industry to the UK market,’ says Liberum’s Barnfarther.
As Greene King revealed the sale, George Magnus from CK said: ‘[The] strategy is to look for businesses with stable and resilient characteristics and strong cash flow generating capabilities.
‘The UK pub and brewing sector shares these characteristics and we believe that this sector will continue to be an important part of British culture and the eating and drinking-out market in the long run.’
Greene King makes the Old Speckled, Abbot Ale and Green King IPA beers at its two breweries
While this does instil some faith that CK would seek to preserve and grow Greene King and its pubs as per its existing strategy, the move by the property mogul does cast some doubt over the already precarious future of Britain’s much-loved pubs.
Some analysts point out that because CK’s interest is driven by value of Greene King’s bricks and mortar (rather than a particular penchant for British beer and all the associated costs that come with it) some under performing pubs could be at risk of closure later down the line.
Markets.com analyst Neil Wilson thinks the deal could eventually lead to more pub closures across the UK as the firm’s new suitor gets to grips with the ‘battered pub trade’.
‘It’s a whopping premium that implies CKA sees significant value in the property portfolio. For the battered pub trade, it’s clear the real value lies in the property.
‘While it’s a bottle of champagne for shareholders, there may be fewer reasons to celebrate for patrons. I think we can comfortably expect more pub closures,’ Wilson says.
Greene King closed more than 110 pubs in its last financial year in a bid to slash overheads.
Recent figures show that 378 pubs shut down permanently between July and December last year in England, Scotland and Wales, as costs including business rates, rents and wages continued to rise.
There’s also a long running row over the so-called ‘beer tie’, which is said to be forcing a number of publicans out of the industry and contributing to the closures. (Read more here)
Greene King itself shut more than 110 pubs in its last financial year in a bid to slash overheads.
Camra, the pub-backing industry body, also raised concerns over the ‘very concerning’ deal and called for a firm guarantee from CK to keep Greene King’s remaining pubs open.
‘The news that Britain’s largest pub and brewery company has been sold to an international asset company is very concerning for our beer scene, says Camra chairman Nik Antona.
CAMRA says: ‘We are always wary of one company controlling a large share of the market’
‘We are always wary of one company controlling a large share of the market, which is seldom beneficial for consumers. We hope that Greene King will continue its operations as normal without any disappointing changes.’
He added: ‘We will be calling on the new owners to retain the current pub portfolio to safeguard thousands of pubs and jobs across the country.’
Greene King’s boss Nick Mackenzie reassured investors of CK’s credentials as an ‘experienced UK investor’ and pointed out that the new suitor ‘shares many of Greene King’s business philosophies’.
‘They understand the strengths of our business and we welcome their commitment to working with the existing management team, evolving the strategy and investing in the business to ensure its continued long-term growth,’ Mackenzie said.
Could more pubs firms follow suit?
As UK firms with property assets remain catnip to international investors, Canaccord’s Parson says pub chain rival Mitchells and Butlers could be next in line for a sale.
Its concentrated share ownership means a buyer ‘would only need to make a few calls’ to gauge interest, he says.
Shore Capital research analyst Greg Johnson meanwhile says the ‘obvious read across’ from the Greene King sale is a swoop for its peer Marston’s, which also has a large pub estate and a ‘burgeoning beer business’.
Johnson points out that Whitbread may also be vulnerable to a takeover following its sale of Costa Coffee to Coca Cola and the 60 per cent freehold exposure it has on its hotel chain Premier Inn.
Look out for more international takeovers in the weeks and months ahead.