On the back of the announcement of Greene King’s preliminary results for the 52 weeks to 3 May, M&C speaks to chief executive Rooney Anand about the integration of Greene King and Spirit brands, his plans for future acquisitions and disposals and the impact a change to the drink driving laws would have on England & Wales.
Spirit acquisition
Anand said there would be a “careful integration” of the two portfolios but said the combined estate offered increased flexibility via estate and brand optimisation. He confirmed that Jonathan Webster had been appointed integration director.
Together Greene King now has a 3,100-strong estate with over 1,000 in London and the south east and a total managed estate of 1,800. Combined revenue tops £2.1bn.
On integration, Anand said: “We have to look at the estate and think about which of the 14 brands across the combined portfolio are winners and which have question marks over them. Having only owned the company for eight days, it’s still a little early to talk about that but it will be based on a mixture of proper diagnostics, customer research and management intuition. That last one is really important because you are looking at how you are going to move the company forward. The diagnostics are very useful but you need to be conscious that it is historical data.”
It has also emerged that the Competitions and Markets Authority’s consultation into the merger prompted just one response, requesting “that the undertakings be amended to regulate Greene King’s corporate conduct post-merger in order to provide financial and contractual protections for landlords, publicans, tenants and employees”. The CMA decided the comment was not relevant and dropped its concerns to the deal.
Brands
Anand said branded pubs had undergone a renaissance in recent years.
He said: “I can remember years ago the notion that branded pubs would be popular places to eat in was very unfashionable. People referred to them as ‘blanded pubs’. What has happened is the professionalisation of the retail managed space. That really started to gather pace around 2007 and I think there are two reasons for that – one is the smoking ban and the other is the recession. In combination they forced us to focus even harder on the customer experience and on improving our menu. It forced all of us to raise our game in terms of food and service and since then you have seen the branded retail guys have performed very strongly through the downturn.
“If you look at the forecast from M&C Allegra and others over the next five years, it shows both in the pub and restaurant space branded operators are forecast to grow faster than independents.”
Across the Greene King-only brands, Hungry Horse grew across the year from 226 to 241 sites; Old English Inns dropped slightly from 116 to 115; Loch Fyne was flat at 4; Farmhouse Inns grew from 21 to 31 and Eating Inn remained at 29.
Across the combined GK/Spirit portfolio 81% of revenue will come from retail, 10% from the Pub Partners category and 9% from Brewing & Brands.
Franchise agreements
Greene King increased the number of sites run under franchise or franchise-style agreements to 58 last year. The range of agreements on offer include a retail concept built around local provenance and Meet & Eat, a fully accredited turn-key franchise agreement.
Anand said: “Clive Chesser, who runs our tenanted business, is a strong proponent of the franchised agreement. We are supportive as long as it works for the franchisee and it works for us as well. It is obviously a higher cost model in terms of the support and infrastructure you have to put in if you want to do it properly and let me be clear that these are proper branded franchises.
“We developed franchises a long time before the spectre of the MRO. It’s not about avoiding that. Even if that was our plan the Government has indicated that if franchises are excluded companies will not be allowed to use them to get under the threshold.”
Conversions, acquisitions and sales
Greene King transferred six sites from its Pub Partners division into retail during the year.
On future conversions, Anand said: “The Spirit deal gives us a larger and higher quality tenanted estate there and there will be plenty of opportunities to transfer some back into Retail.
During the financial year the company added 32 sites to its Retail estate at a total cost of £75.9m.
It has said 16 new pubs are likely to be brought in during the next year.
Anand said: “They are likely to be Hungry Horses and Farmhouse Inns but we can’t give any geographic detail at this stage.”
A similar number of disposals are expected.
Anand: “We look at the pub assets from bottom up and review them and think long-term what are the prospects for that individual pub. We look at the competitive dimensions and that has broadened out a lot – we are looking at restaurants, fast casual, take-aways, not just pubs.”
Scotland
The 0.6% increase in like-for-like sales would have been 1.1% if the Scottish performance was excluded and Anand admitted the impact of the change to the drink driving laws had affected trade.
He said: “In Scotland this was announced with very little notification or consultation. It was a profound change. We are trying our best to mitigate those effects. We are doing some promotions directly targeted at the designated driver and expanding our range of non-alcoholic drinks as well as constantly improving our food offer.
“None of this changes our attitudes towards Scotland. We still see it as a really attractive market. We are opening a Hungry Horse and Farmhouse Inns and we are seeing very good rates of growth and return out of them.
“We shouldn’t discount the notion that this could also happen in England & Wales. We saw that with the smoking ban, where it started in Scotland before it travelled down. I’m sure the BBPA and the panoply of industry bodies are doing their best in the corridors of power to ensure our concerns about this are raised at the highest level.
“If it did come in we would have to work out how we work around that but it would have huge implications, as the smoking ban did.”
Analyst reaction
Douglas Jack, of Numis, said the continuing Hold recommendation reflected the Spirit acquisition.
He said: “We are holding our forecasts. Trading has remained weak in early 2016E with managed LFL sales up 0.6% (vs a comp of just 1.1%), tenanted/leased LFL net income growth slowing to 1.2%, and own-brewed volumes falling by 3.7%. Overall, this is slightly behind. We expect the full £30m of synergies to be achieved by the end of 2018E, with £10m captured in 2016E.
“We believe Greene King’s freehold ratio has fallen to c.83% from 94%, with its cost of debt rising to over 7% from 6.2%. Given this, integration risks and a lack of LFL momentum in the managed estate, it is hard to justify the EV/EBITDA rating being above the current 2016E level, which is in line with the peer group average.”
Mark Brumby, of Langton Capital, said: “Greene King’s numbers are perhaps a shade below best expectations but the disposal of 275 pubs to Hawthorn Leisure was always going to distort trading.
“Within Retail, margins are lower but they were on an improving trend.
“The integration of Spirit will have begun, but it is too early to say much else.
“We will, over the next couple of years or so, be able to observe whether the integration benefits re Spirit and the positive impact (if any) of being the largest licensed retailer in the UK are able to furnish greater-than-market returns.
“The group says that it will open 15 sites this year, fewer than JDW, MARS etc. but most eyes will be on the Spirit purchase.
“Numbers are understandably a little fluid but GNK looks as though it should earn around 64.0p, suggesting that the group’s shares trade on around 13.2x earnings. The group’s shares yield around 3.7%.
“Overall, GNK has sold many of its bottom end tenancies and has purchased Spirit. The average quality of the estate is improved. There will still be some low-hanging fruit re capex (though Mr Tye & team will have harvested much of it) and the integration benefits, though one-off, should be achievable. The group’s shares are not expensive but, in an industry with a number of operators in which one can invest one’s money, we are not short of choice.”
