Heineken’s bid for Punch would see the Dutch brewer and pub operator take on 1,900 pubs – with Patron Capital retaining the remaining 1,300 in the estate, MCA understands.
The proposal to offer 174p per share by real estate fund Patron (valuing it at £386m excluding debt of £1.18bn) would see Heineken acquire the Punch A estate, which encompassed 1,659 core pubs at the latest count, as well as 236 non-core sites. It also carries debts of £793m.
MCA understands that Patron, which owns Generator Hostels among other investments, would retain the other 1,329 pubs from Punch B (1,115 core and 214 non-core as of August) along with £529m of debt.
Less is known of the likely intentions of Punch’s second suitor – Emerald Investment Partners, which has submitted a higher bid of 185p per share for the entire estate. The company was launched in 2012 by Alan McIntosh, who was involved in the creation of Punch Taverns along with Hugh Osmond. It is chaired by Neil Hyman, who worked as a corporate and M&A lawyer for Slaughter & Ma, on acquisitions including Wellington PubCo, Bass, Allied Domecq and Punch’s initial securitisation. Emerald currently owns 2.2% of the issued share capital if Punch.
Little is known about how either side proposes to finance the deal. The statement to the city gives away little other than mentioning that Punch is in “advanced discussions” with Patron and Heineken but simply “discussions” with Emerald. It also mentioned the latter’s deal being conditional on arranging committed financing.
Punch’s share price rose 38% on the back of the announcement to 177p. Heineken’s was narrowly down.
Both sides have until 11 January to make a firm intention of an offer.
Comment by MCA deputy editor, James Wallin
I’d like to say I saw this coming.
The only comfort I have received in speaking to people far cleverer and better connected than me this afternoon (as well as watching Punch’s share price), is that clearly no one else did either.
This could be a game-changing move for the pub industry and more specifically the tenanted and leased sector, which seemed set to enter a much anticipated period of calm.
If indeed Heineken does come out on top in the bidding war with Emerald, it will leapfrog up the pubco league table with a total estate just shy of 3,000, putting it narrowly behind Greene King’s current portfolio just north of that number, but still some way behind Enterprise’s 4,800 array of pubs (across all operating models).
The opportunities for Heineken are clear in terms of beer supply – at one fell swoop this would create a sizeable new channel for the brewer. Volume is such a vital issue to Heineken that MCA understands when it sold 111 pubs to Admiral Taverns in September 2014, right up to the actual completion of the deal the loss of volume remained a cause for concern.
However, the scale of the deal would also present significant challenges. Lawson Mountstevens’ one-year anniversary as managing director at Star (after previously heading up the on-trade division) coincides almost to the day with the “put up or shut up” deadline for the bid that could see his estate treble overnight.
Punch’s chief executive Duncan Garrood is also a relative newcomer to his post, having been appointed to the role in June last year. During that time he has overseen a significant evolution of the pubco’s model – introducing a retail agreements division, Falcon, which is rolling out rapidly and overseeing the expansion and creation of key retail formats. He has also introduced a new approach to the former turnaround division, and slowed the approach to disposals. These changes, coupled with chairman Stephen Billingham’s success in overseeing the restructure of the pubco’s £2.4bn debt in 2014 have undoubtedly made Punch a more attractive business, though net debt to EBITDA leverage remains at c.6.6 times.
Since joining Punch, Garrood has been a high-profile representative for a company that has in the past sometimes been characterised as a faceless corporation. Even among the key figures in the pubco reform camp there is respect and in some cases warmth for Garrood.
If he gets this deal away, and with two bids this seems likely, his stock in the pub sector will be sky high – whether or not he chooses to stay in the industry.
It will be interesting to see, if Heineken emerges as the winner, whether long-serving lieutenants and key figures in the recent transformation of the Punch model – such as Paul Pavli, David Wigham and Giles Kendrick – will be tasked to continue with the job they started.
Punch’s share price has predictably rocketed since the announcement but Mark Brumby, of Langton Capital – who has repeatedly argued that Punch is undervalued – says the price still looks cheap to him.
The Heineken/Patron bid potentially works out at £620k per Punch pub but Brumby told MCA: “The property valuers tell us the Net Asset Value of Punch is 285p per share – so essentially if you wanted to build an estate of Punch’s quality that’s what it would cost you – plus the 20 odd years it would require. If that’s the case, why should anyone be able to walk away with it for under 200p?”
For a while some leading analysts have been forecasting, indeed arguing for, some kind of consolidation at the top end of the UK’s eating and drinking out market (Mitchells & Butlers acquiring The Restaurant Group being one). Few - hardly any - would have picked Punch as the one to herald in a new era of “big deals and big synergies”.
However, if this last twist in a year not short of surprises comes to fruition, questions will inevitably be asked as to whether there is more to come. Could Enterprise Inns be the next to be courted?
Brumby said: “What Heineken’s approach shows is that the vertically integrated model is back in fashion. It makes sense to brewers again after the damage done to it by the Beer Orders.
“The big global brewers are clearly in an acquisitive mood at the moment and constantly seeking to get the edge on their competitors. In my view it would make sense for all of them to own sizeable pub estates. I don’t necessarily see this as a catalyst but it could prompt other big brewers to take another look at the UK pub scene and whether there are deals to be done.”
