Change the only constant

Dec 4 2007 By The Journal

WITH Greene King’s recent acquisition of the North-East- based New Century Inns at a reported £32.6m for 49 tenanted and leased pubs, analysts would argue that this equates to an average of £665,000 per unit.

Very roughly, this translates to a year’s purchase or multiplier of 10.25 per unit assuming each unit had a 25% EBITDA (earnings before interest, taxation, depreciation and amortisation).

This would be well above the traditional average of six to eight years’ purchase. But package sales have for a number of years now thrown up analyses which differ from the analysis of the single unit.

The reason often is that a purchaser of a package gains not only market presence and share but also increases their barrelage performance which may or may not be passed through to their tenants. Moreover, it is usual that half the income from the amusement machines would be returned to the pub company.

This is why the acquisition on this sort of scale and the average premium paid per unit may be well above the price paid for a private individual acquiring their first business.

There is still unsatisfied demand in the market from the major players who we have seen being as acquisitive as ever and even some single acquisitions by them, provided the vendor enters into a sale and leaseback, can be at very high multipliers which again is due to barrelage and to rental income stream factors.

But all this begs the question of whether the private individual can, in fact, purchase a freehold property in the present market when they are competing against the major pub companies (pubcos) which will nearly always have the financial muscle to outbid them.

However, firstly the pubcos tend to have set acquisition criteria and an outlet which does not fit their model but which may well be attainable by the single pub buyer. Secondly, some pubs which were purchased by former pubcos are coming on to the market; many of these were over-rented and neglected by the previous owners, resulting in the double whammy of former tenants not having had the wherewithal to invest in their business and the landlord’s under-spend on maintenance.

They thus may have potential and be within the financial reach of the individual. Thirdly, prospective new buyers should also consider the growing number of leasehold pubs coming on to the market. These businesses offer an excellent opportunity to the first-time buyer as an entry-level business and in some cases the in-going premium requires a limited investment, thus allowing the purchaser the opportunity to develop and invest in the business and produce an acceptable return.

There have, however, been some big headlines about the direction house prices may take – and the equity realised from the sale of a house often provides the means to secure commercial lending on a pub purchase – but many of these comments are unfounded and often are from people taking a view they hope may be proved right which will enable them to grab another headline.

Nevertheless, we have seen a number of changes over the past 18 months or so and they need to be put into perspective. There have been five quarter-percent interest rate rises since and including August 2006 and the much-reported credit crunch emerging in August this year. We have also seen the introduction of the smoking ban on July 1.

The first four interest rate rises had, in our experience, little effect in the market because the effective demand for freehold leisure property and public houses in particular was so strong.

Perhaps the last rise in July, the introduction of the smoking ban, the poor summer, the credit crunch or the fact that we are moving towards the festive season, or indeed a combination of two or more of these factors, has led to a slight slowdown of market activity but we would expect this to pick up next year as, for a start, there has been recent speculation that interest rates may be lowered.

The effect of the smoking ban has been varied with many outlets seeing no change in like-for-like sales whereas some others have seen a reduction of 10% or so.

However, because the summer weather has been so poor, where outlets have seen sales dip it remains to be seen whether the smoking ban is solely to blame.

But the time to really assess the impact of the smoking ban will be in July next year when we have traded through the winter months and seen how many smokers are prepared to venture into the cold night air for a smoke. Neither must one overlook the positive aspects of the ban and that for many a trip to a smoke-free pub or club may now be back on the agenda.

So as ever, the market is changing a lot and having to cope with factors outside its control and legislation and will also, in 2008, now have to deal with the fact that none of the home nations will be participating in the European Championship!

nigel.westwood@sandersonweatherall.com