Whilst we can see the possibility of a good outcome for the managed pub industry, the outcomes for leased pubs seems far less certain. At the moment, I don’t see much opportunity in the equity of these companies (although given the complexity, I would imagine there is some value in a capital structure arb). Despite this there is definitely some value in understanding these companies as they constitute an important part of the overall pub industry and will influence the outcome for managed pubs. I will briefly summarize some of the main issues discussed in the last post (on managed pubs) and link them to the leased pub business model.
The main question facing the industry is: Does the tied business model work? It’s a difficult question but, probably not. The key to answering this question is working out what these companies do and how they fit into the industry. If you think the leased model serves a useful purpose then these companies will make a comeback after shedding overcapacity. However, it is somewhat difficult to see what purpose they really serve outside of financial engineering. Indeed, all these companies appear to do (in terms of their actual operations), especially in the case of Punch and Enterprise, is speculate on the value of property/pubs. They take capital from markets, buy pubs and lease them out. Indeed, in a time of rising property prices there is clearly no incentive to secure the viability of the underlying pub business as the company has the security of the property (which always gets more valuable, of course).
On the other hand, the only time this model fell apart is when the financing part of the business went wrong. The financial burden of the debt meant the company placed more pressure on its lessees resulting in complete operating failure. Despite this, some, or even most, of the underlying pubs probably are viable as underlying businesses (given lower fixed costs and freedom to price competitively). Therefore, value can be created by transferring these pubs back to freeholds. However, the debt still remains (a restructuring by the end of the year seems certain for Punch) and there won’t be a lot of good bids for these pubs. Either way, these asset sales are going to be important for the future of these leased pub business. So the question of whether these companies can survive as smaller…
