Eclectic Bar announced a dramatic change of strategy this morning with the acquisition of Brighton Pier. This looks a good deal but doesn’t explain where this business goes next.
The deal values Brighton Pier at £18m on a cash-free, debt-free basis. Eclectic Bar will fund £8.5m of this, at least, through a placing of new shares with the balance funded with £13m of debt. Reuben Harley, Eclectic Bar’s Chief Executive, will step down following the acquisition and sell all of his shares.
Eclectic Bar hasn’t had much success since listing in late 2013. Shares were sold on the basis of a roll-up of the UK premium bar market but growth has been much slower than expected as students, a key demographic, turned away from the company’s bars and acquisitions dried up.
Luke Johnson, leisure investor of Pizza Express fame, came in as Executive Chairman last year buying 3m shares. Reuben Harley subscribed to this placing too, the strategy has obviously changed since then.
Management characterise today’s deal as an “opportunity for the Group to acquire an iconic British asset whilst also broadening its business and diversifying its existing portfolio”. The free cash flow generated will provide the cash for future acquisitions.
Combined with the departure of the CEO, this deal looks like an admission of defeat. The bar stuff isn’t working out, so we acquired a pier. On first glance, this looks more reasonable than it sounds but it does create more questions than it answers.
The purchase price of £18m is 5.1x EBITDA, hardly an ambitious valuation for the most visited attraction in the UK, outside of London. If we dig into the detail though, it becomes a bit more murky.
First, EBITDA isn’t a good measure of profit. EBITDA is useful if capex is low or the capital structure is changing significantly, neither applies here. Making sure the pier doesn’t fall into the water is, in fact, an important expense that you probably shouldn’t add back. Management believe maintenance capex is ~£0.7m/year, suggesting a FCF yield ~13%. Still a very reasonable valuation.
Second, Brighton Pier has been an expensive asset to hold in the past. After the 2010 report from the surveyor, the previous owner was stuck with a bill for what turned out to be £5m in “catch-up” capex. This was why they tried, and failed, to sell the Pier in 2011. In fact, Noble Group purchased the pier back in 1984 and, apparently, have…
