The first company that I am going to look at in the pub sector, after building my view of the industry in the previous two posts, is Punch/Spirit. As the company is planning a spin-off of its managed pub business, Spirit, I will look at each business separately. Unfortunately, we also have to conclude that the previous financial statements are completely useless going forward as the industry is going through changes which alter the fundamentals entirely. There are many dimensions to these changes but the most important changes are in the leased pub sector where, I believe, drinks income will, relative to current conditions, cease. I originally anticipated that this would be unrelated to the asset sales but after some help from people in the industry I discovered that they were linked. The result is that a debt restructuring is certain as is more impairment of property. However, this is all for later. I will first discuss the managed business.
Spirit’s Managed Pubs – Above I have reproduced those tables from my look at the managed pub industry. I think one misconception about the spin-off could be that we are separating a good from a bad business. From the above tables it is pretty clear that, in fact, it is a separation of a bad business from a terrible business. In particular, we see that its margins are really quite worrying. Furthermore, we get a breakdown of the assets employed in the managed business meaning the pre-finance, pre-tax ROE is around 4.7%. Indeed, considering that Spirit will be carrying around £900m in debt it seems likely that the actual net profit figure would be really dire.
Looking at margins more closely, PUB has operating margins of 7%, Greene, Marstons and Wetherspoons have 13% and M&B has margins of nearly 17% (Young’s perhaps isn’t comparable but has operating margins near 20%). It is always difficult to work out what is going on with margins as it isn’t broken out in detail for most of these companies.
The first thing is that it can’t be anything to do with the scale of the business. While M&B may have lower costs through its large number of stores, we can see that…
