Punch Taverns – New detail about the demerger

Below we have the latest releases about the demerger. The documents fill in most of the gaps about the business so it only makes sense to put these into what I have done already.

The basic conclusion is that Spirit is looking better and Punch is looking about the same.

PunchTavernsAnalystPresentation7thJuly2011

ProposeddemergerofPunchTavernsplcsSpiritbusinessRNSdoc

 

Spirit – The fundamental conclusion from the last post on Punch was that the managed pubs really aren’t fantastically profitable but they are definitely worth something. The valuation range was based on a multiple of operating profit of between 5-7x which suggest a range of between £280-400m. However, margins have been bumped up by almost a full percentage point to 13.5% in the first half compared with first half last year presumably as a result of asset sales. I am going to be conservative and leave this value where it is. Likewise, I don’t see any reason to alter the Spirit’s leased pub assets, £560-700m.

The big difference is my estimate of debt, which I put at £900m. I didn’t really have any better information but I knew this to be vaguely wrong. The net debt for Spirit is currently £750m, which is obviously quite a big difference. The value of operations in the worst case is £840m, which now looks really quite bearish, and in the base case £1.1bn. Subtracting net debt, the value of equity is £90m and £350m, respectively. As the exchange ratio is 1 for 1, this gives a value of between 13-54p. As we have the net profit figures for Spirit now as well this implies a P/E of 2.95x and 12x, respectively. Certainly, a value near £400m appears quite possible now.

Punch – There isn’t as much to add here but the company breaks down the book value of its pubs. For the turnaround division, this is £278k per pub giving a total value of £633m. This is bang in the middle of my estimate for the division overall and I think it is roughly accurate reflecting the current demand for these properties for alternative use.

The company also breaks out the book values for the core properties which are valued at £702k per pub giving a total value of £2080m. It is this valuation which I have a bit more of a problem with as I think there is a difference between what a pub is worth to Punch and what it is worth to a freeholder (I am told that Punch offers values at the price the pub is worth to Punch not for the freeholder). The problem here is that I believe the dynamics between operator and pubco will change meaning income will possibly halve. The result is that while a valuation on outlet EBITDA might make sense now as this is roughly the value to Punch, when operators start making more and Punch less it might make a big difference. In addition, the core division pubs supposedly make double the net income of the turnaround pubs but are worth, on average, 3.2x more.

To be honest, I don’t completely understand the relationship between what a pub is worth to Punch and what it is worth to its freeholders and I am not too sure how this is going to play out. In the end, I think a lot of this may turn on the bondholders. Either way, I am just going to be conservative and say it is still not worth anything.