M&A continues at pace in the Pub sector with the latest transaction being CK Asset Holdings’ (“CKA”) acquisition of Greene King (“GK”), the Bury St Edmunds-based pubco & brewer, known for its IPA & brands such as Old Speckled Hen & Abbot Ale. The transaction is the third deal of scale since Fuller’s Brewery was acquired by Asahi in January for £250m and TDR Capital backed Stonegate’s acquisition of Ei Group (“Ei”) just last month for ~£3bn.
Greene King, founded in 1799, comprises of two breweries and ~2,700 predominately freehold pubs. The acquisition by CKA, the investment vehicle of one of Hong Kong’s richest men, represents the second overseas investment into the sector this year following Asahi’s acquisition of the Fuller’s Brewery.
The GK transaction, on paper, looks like a great deal for shareholders and will almost certainly be accepted, you would think. The deal at an Enterprise value of £4.6bn, represents an equity value of £2.7bn (850p per share), a 51% premium to the closing share price on 16 August, the Friday prior to the announcement. The multiple is also attractive at 9.6x CY EBITDA.
Stonegate’s acquisition of Ei equated to an Enterprise Value of ~£3bn (11x CY EBITDA), valuing its equity at £1.3bn (285p per share), representing a 38% premium to the closing share price on 17 July. The deal moved Stonegate in to the illustrious position as being the largest owner of pubs in the UK after assuming Ei’s 4,400 pubs.
The multiple for Ei is likely greater due to its predominantly tenanted portfolio, relative to GK’s substantial managed house operations. Both businesses have very strong (>80%) freehold backing underpinning their valuations.
Fuller’s transformative sale of its beer business to Asahi for an Enterprise Value of £250m was this year’s first deal of scale in the sector. The deal represented a multiple of 23.6x HY EBITDA (£10.6m for the year ended 31 March 2018). JP Morgan estimates put the adjusted HY EBITDA multiple at closer to 16x once adjusted for the freehold value of Fuller’s Griffin brewery. Still a great result for shareholders. No doubt Asahi believe they can realise substantial synergies through integrating the business into their wider group.
The deal activity continues to demonstrate that visits to the British pub remain an enduring activity in the minds of consumers.
Following a significant clear-out, pub numbers have been steadily decreasing from ~60,000 in the early noughties to ~46,000 today. The supply side dynamic in the Pub sector is markedly different to the oversupply seen in casual dining, enabling strong operators to generate LFL revenue growth. A number of wet-led managed operators such as Young’s, Fullers and City Pub Co are doing just that and continued to deliver strong performance in what are still challenging conditions.
Further, many of the listed pubcos have worked on rationalising their estates over this period and are now left with high quality estates, increasingly prepared to respond to consumer trends towards premiumisation, localised offerings and experiential activities.
Unlike the casual dining sector or bricks and mortar retail, the listed Pub sector’s largely freehold (~80%) asset backing provides a level of resilience to the sector.
One could argue that the driver behind both Stonegate’s acquisition of Ei and CKA’s GK acquisition is in the property; investors are seeing the underlying value in pubcos, underpinned by their substantial freehold make-up which has not always been fully reflected in their share prices. As a result, UK pubcos are presenting an opportunity for investors to acquire asset-backed UK businesses in what is a relatively stable sector, despite the challenging wider UK macroeconomic climate.
You also can’t ignore the impact that the decline in Sterling has had with overseas investors now able to invest in UK assets at materially lower prices (~20%) than in recent years. No doubt this was not overlooked by Asahi or CKA when appraising their investments and I expect this trend to continue.
Common themes are still very much present in the market:
- Local focus - Operators are increasingly taking a hyper-local approach to site design, tailoring sites to meet the needs of local communities and embracing the pub’s history, rather than applying a “cookie-cutter” approach.
- Authenticity and provenance – There is an increasing demand from consumers for authenticity and provenance. The ongoing consumer shift from branded operators towards a preference for “independent pubs” is continuing.
- Experiential propositions - The preference for experiences over material goods is only strengthening as the search for “instagrammable moments” continues. Groups like Inception Group (Mr Fogg’s), Incipio Group (Pergola), Laine Pub Company and New World Trading Company are great examples of innovative brands creating memorable guest experiences.
- Premiumisation – Increasingly pub groups are differentiating themselves with premium drinks offerings. City Pub Company has been a fantastic example of this strategy, combining authentic, locally tailored pubs with a great premium proposition.
- Accommodation - The opportunity available for pub groups to “sweat their assets” fully and take advantage of the boom in accommodation sales (and the ever-growing popularity of the “staycation”) is not going unnoticed. Operators are continuing to explore converting unused “upper parts” and I expect this to continue.
Looking forward, the attractive multiples achieved for Fuller’s, Ei & Greene King will no doubt make competitor CEOs, Boards and Shareholders start questioning what their value could be outside of public markets.
The transactions have already impacted the share prices of other listed pub groups in the last week (14 August to 21 August) with Marston’s +16%, Mitchells & Butlers +10%, JD Wetherspoon +7%, City Pub Co +6%, and Shepherd Neame +5%.
Marston’s diversified portfolio & substantial freehold base will no doubt be attractive for some, alongside Mitchells & Butlers which also looks comparatively cheap relative to its peers at 7.6x EV/CY EBITDA. I wouldn’t be surprised if offers came in for either party over the next 12 months.
The sale of Fuller’s brewery highlighted the value within brewing divisions and it will certainly be interesting to see what CKA’s views are on the Greene King brewing division. Similarly, Marston’s may consider exploring the value of its own brewing arm which contains a number of heritage brands that could be appealing to investors. The Fullers transaction has shown that the benefits of a fully vertically integrated model may not be what they once were.
A clear difference in the Pub sector compared to casual dining remains the existence of a much broader and varied trade buyer pool. As a result, I expect well-capitalised groups such as Punch, Young’s and Stonegate (once it has digested Ei Group) to continue actively look to acquire in the space. Further, with Fuller’s having the proceeds of the brewery sale sitting on its balance sheet, watch out for the Simon Emeny-led group looking at selected M&A activity over the next 12 months to drive growth.
Private Equity interest in the sector remains strong. Equity houses, who are sitting on substantial dry powder, are still actively looking in the sector for quality operators with differentiated propositions who are able to demonstrate the ability to scale and deliver strong returns.
There continue to be a number of exciting fast growing managed pub and bar groups that are likely to be on investors’ radars, presenting the possibility of further consolidation in the pub arena.
Groups such as Drake & Morgan, NWTC, Alchemist, Brewhouse & Kitchen, White Brasserie, Red Mist Leisure, Chestnut Group, Anglian Country Inns, and Inception Group are all likely to be receiving knocks on the door.
Watch this space: it feels like the sector will continue to be active for the foreseeable future!