Tchenguiz edges ahead in Spirit race

As we reported last Friday night, the £3bn auction of Spirit Group appears to be entering its final stages. Robert Tchenguiz, the acquisitive property magnate who has spent £900m in the past 12 months buying up pubs assets, is tipped as favourite, just ahead of Punch Taverns, the leased and tenanted behemoth. Tchenguiz, who owns a raft of high street chains such as Slug & Lettuce and Yates, has submitted a bid of just over £2.8bn to Spirit's advisers at Merrill Lynch through his private equity vehicle R20. The offer is thought to be backed by Kaupthing, the Icelandic bank, and Barclays. Punch has tabled a bid of around £2.7bn and has financing in place from Citigroup, Morgan Stanley and Royal Bank of Scotland. Some have suggested that although Punch has tabled a lower bid than R20, it may yet be selected as the preferred bidder because of certain favourable terms laid out in its offer, such as an ability to complete quickly - and ahead of the R20 camp. As with all such processes, speed is highly desirable to the vendor. Someone even suggested to me last week that Texas Pacific Group, one of Spirit's four main shareholders, is particularly keen to work to a tight deadline so that it can book the profit ahead of its year-end. Although Punch has developed a reputation for delivering on deals way ahead of schedule - particularly in the case of InnSpired and Avebury - it may not be able to be so nimble on this occasion. The purchase of Spirit would represent a Class One transaction and therefore necessitate recourse to shareholders for approval - not to mention the possible need to ask them to part finance the deal through a placing. The other bidders, which comprise Robin Saunders' Clearbrook Capital and the Barclay brothers, are still involved in the auction but are said to be some way behind R20 and Punch. At the same time Spirit and its advisers insist that a sale of the business is not a forgone conclusion but reports in yesterday's newspapers went as far as to suggest that R20 could enter exclusivity as earlier as Monday. If this is the case, it would catapult Tchenguiz up the ladder of Britain's biggest pub landlords, making him the owner of what is effectively Britain's biggest private pub group. It will also bring his pub dealmaking of the past year into sharper focus. A former shareholder in Pubmaster, he returned to the pub sector last September with the acquisition of Laurel Pub Company for £163m. This was quickly followed with the acquisition of Yates Group for £202m, which was subsumed into Laurel. Around the same time, in December 2004, he bought 364 pubs from Spirit Group for £345m, which were farmed out on a management contract to Scottish & Newcastle Pub Enterprises, the leased operator, under a separate division called Globe. Although Tchenguiz, and his chief dealmaker Aaron Brown, looked at many things in the interim, it was six months before his next purchase, when he acquired the lion's share of SFI Group for about £80m. This was also amalgamated into Laurel. Soon after he bought Heritage Pub Company, a tenanted and leased concern, which was rolled into Globe, although some of this has since been sold on. The bill, for almost 1,000 pubs, comes to almost £900m. As might be expected of someone who has amassed a £500m personal fortune, Tchenguiz is said to be a fairly bright individual. He likes the stable cashflows and asset-backed nature of the pub business. He made a lot of money through Pubmaster and is clearly confident that the assets he currently owns can only accrue in value. He is obviously astute. And he is clearly efficient when it comes to getting the deal done. But his operational achievements as proprietor of Laurel are less obvious. The company is said to be anything but a happy ship - it appears to be haemorrhaging people and the numbers are said to be going backwards at a rate. The end game is unclear. The focus for Tchenguiz is the property. His modus operandi involves operating a “Propco-Opco” structure, whereby he splits a company like Laurel in two, with a property company that owns the assets, and an operating company that runs the businesses and pays rent to the propco. He then leverages the two businesses to the hilt, maximising the amount of debt in each, which is how he is able to finance these deals with minimum equity. Property and finance are where Tchenguiz adds value so perhaps it should not come as a surprise that the operations of these businesses appears to be something of an afterthought. As long as the Opco can service the rent, little else matters.0 The prospect of £3bn's worth of pubs may just focus the mind away from bricks and mortar and to how he is actually going to make his pub empire work operationally. Because so far Tchenguiz appears to do the deal - and little else. It may be that he intends to retain the services of Karen Jones and her Spirit management team. Although Jones is said to be in line for a £30m payout she achieved financial independence log before her current role. Given what she has just done at Spirit, she clearly relishes a challenge.