Greene King play gives sector liquid courage

News that Hong Kong’s CK Asset Holdings has agreed a deal to buy the UK’s biggest pub owner, Greene King, has been toasted with a cheer by many property players, who think a round of takeovers could now be lined up. Shareholders watched in glee as shares in the FTSE 250 pub giant soared 51% on Monday after the announcement of the deal, before softening slightly on Tuesday.  Shares in peers Marston’s, JD Wetherspoon and Mitchells & Butlers have also risen since news of the acquisition broke. The deal is a much-needed vote of confidence in the UK pub sector, which has struggled over recent years with rising cost and cultural shifts driving closures.  CK Asset’s offer values Greene King, which operates more than 2,700 bars, restaurants and hotels, at £4.6bn ($5.5bn), including debt. The deal represents a 51% premium to Green King’s closing share price of 563p last Friday.  Industry sources suggest that the deal is likely to fuel more consolidation and encourage further investment into the sector.  One senior real estate finance source said: “It will drive up valuations in the sector and it will also get other investors looking at it. Of scale, there are not a lot of big opportunities though, so it throws a spotlight on Mitchells & Butlers, and Marston’s.” Simon Hall, director and head of pubs at Fleurets, says: “A 51% premium is a massive price. It is nine-and-a-half times the firm’s EBITDA, which is fair value. The deal reflects how the stock market has undervalued Greene King, and probably most pubs. Shareholders of other pub companies will be happy.” The takeover is the second multibillion-pound pub deal in recent weeks. In July, Stonegate Pub Company, operator of the Slug and Lettuce chain, agreed a £3bn acquisition of Ei Group. Interest in the sector has caused yields to fall, with investors also tempted by pubs’ longer, relatively secure leases, says Mat Oakley, head of European commercial research at Savills. “Pubs have been really hot. Yields have come down from 7-8% to 4% in three or four years. It’s the last bastion of the 25-year lease in the UK.” The rise in M&A activity comes after a raft of pub closures. According to the Office for National Statistics, the number of pubs in the UK fell from 52,500 in 2001 to 38,815 in 2018. Between July and December last year, 378 pubs shut down permanently in England, Scotland and Wales, representing more than 14 closures a week, according to The Campaign for Real Ale.  Since the start of 2018, some 854 have shut across Great Britain, but the decline has slowed since 980 closures in 2017, the figures show. Pub closures have been slowing as the industry has become more stable, the real estate finance source says. “A lot of capacity has been taken out as many pubs were not viable. But pubs have proved to be pretty resilient compared with casual dining. I think the sector is out of the doldrums now following the smoking ban and the recession.” Buyers such as CK Asset will be influenced by various factors, not least the uncertainty around Brexit and the dramatic drop in sterling which have arguably given them a pricing advantage. “Some people say it is amazing that CK was not put off by the uncertainty of Brexit,” says Fleurets’ Hall. “But I think it is quite the opposite – this deal has happened because of Brexit and the effect that Brexit has had on its share price.” The pub giant’s shares have fallen around 40% since the Brexit vote in 2016, so it is likely that CK Asset thinks the portfolio (which includes 81% freehold properties and a diversified income stream from a mix of pubs, food and accommodation) is undervalued.  “A lot of FTSE mid-cap stocks are undervalued because people are worried about Brexit,” says Neil Wilson, analyst at Markets.com. “Add into that the exchange rate factor, and it is very cheap for foreigners.” Some analysts suggest a new owner is unlikely to do anything radical with Greene King’s portfolio, which they say is already in decent shape given that the company has been regularly selling off unwanted real estate.  Simon Johnson, senior director in CBRE’s pubs and leisure team, says: “I don’t think there will be a wholesale sell down of the real estate. I don’t think they will finance it like that. You have got to remember it has already been selling multi-million pounds’ worth of real estate.”  However, CK Asset could consider selling off parts of the business to help pay down its sizeable £1.9bn debt pile. “There has also been talk about Greene King selling off the tenanted pubs and paying some debt down – they are a cash cow, but an unsexy business,” says Hall.  To send feedback, e-mail anna.ward@egi.co.uk or tweet @annaroxelana or @estatesgazette