Laurel lures yet more property players

The clamour for pub assets among property companies is growing. But most of the interest has switched away from the stable, predictable cashflows of tenanted and leased pubs, to the more volatile managed arena. Property stalwart British Land was the latest to invest in the sector when it bought 65 freeholds from Spirit Group for £174m in a 30-year sale-and-leaseback deal. It follows a similar deal Spirit struck with entrepreneurs Nick Leslau and Tom Hunter earlier in the year. Now as the sale of the remnants of Laurel Pub Company reaches its climax, the property players are once again out in force. Three parties that have made it through to the final round of the auction - GI Partners, the US private equity firm that recently took Yates private; a consortium involving St James Capital, where property agent David Coffer is a partner, and Japanese investment bank Nomura, which bankrolled billions for other investments through its ownership of tenanted and leased pubs in the 1990s (St James Capital and Nomura teamed up recently to buy the Earl’s Court and Olympia exhibition centres); and Robert Tchenguiz’s Rotch Property Group, which is understood to be working in concert with ex-Wizard managing director Chris Hutt. Tchenguiz was a lead investor in Pubmaster before the tenanted group was sold to Punch 12 months ago, a deal from which the entrepreneur was said to have banked a £50m profit. That some highly respected financiers and property players now see value in this segment of the pub market is fascinating. The high street is the intensive care ward for the sector and seems unlikely to yield opportunities for the masses. Yet these guys see value. Perhaps Laurel is just simply an attractive property deal. Property companies, used to yields of 6-7%, are starting to realise they can achieve far greater returns through pubs. Sources have intimated that both the Tchenguiz bid, and that of St James-Nomura, if successful, will involve sale-and-leasebacks of the remaining 120 freeholds in the Laurel estate. Tchenguiz is likely to sell the properties to one of his own companies and then lease them to an operating company, at fairly chunky rental levels. St James-Nomura will need management and is understood to be in discussions with various managed pub operators regarding similar sale-and-leaseback deals, as well as the current Laurel management, led by chief executive Ian Payne. It may well also be engaged with restaurant operators, given its contacts and the appetite for former pub sites among operators such as La Tasca and Wagamama. When the sale of Laurel was announced GI, with Yates, was thought to be the only deal in town. With 180 and 150 bars respectively, Laurel and Yates are still subscale and putting the two together makes sense. GI would be able to strip out head office costs and also renegotiate various supply contracts. Therefore it was anticipated that Yates and GI would be able to justify paying a higher price than others. This has not been the case. All three bids are said to be between the £150m to £160m mark and there was even talk last week that GI’s offer was actually the lowest of the three. The deal itself is said to be extremely complex. The leader of one bid last week said that Greene King’s acquisition of Laurel’s community pub arm in the summer for £684m was starting to look like “the deal of the year”. This is because Greene King bought the pubs “clean” after initial attempts by MidOcean to sell the entire business, failed. Now what is left is a company that used to run 3,000 tenanted and managed pubs. The required levels of due diligence in checking every previous disposal, and property deal, for liabilities, including tax, pensions and everything else, is enormous. That’s not to suggest anything is untoward, merely that the amount scrutiny required in this case means that advisers and lawyers are racking up their usual exorbitant fees – and then some. All will be revealed on November 22, when a preferred bidder is selected. Whatever happens with Laurel, consolidation of the high street is coming. The GI bid is more obviously an immediate consolidation play, but the high street is primed for key groups to start putting these businesses together. And there will be no shortage of deals. Regent Inns could yet go up for sale, and with SFI in year two of a three-year plan and PPM Ventures in year four of a five-year investment cycle with Barracuda, watch this space. There will be no shortage of buyers. The property players are here and will vie with existing operators for every deal.