Further supplementary evidence submitted
by Karl Harrison
Punch Taverns has recently released headline
information from its financial statements for the year to August
2008. The full statements have not been released at the time of
Enterprise Inns has now released headline information
for 2008 but full statements are outstanding.
For the above reasons, unless otherwise stated,
my observations here relate to the year ending August 2008 for
Punch and September 2008 for Enterprise.
|Total tenanted estate
|Total sales||£1.75 Billion
|Beer and Cider||Cost £616 Million
|Sales £1.179 Billion
|Profit £563 Million85%
|Overall Profit as EBITDA||£1 Billion
|Total Debt||£8.8 Billion
|Market Capitalisation||£575 Million
|Total Cost of Debt per Year||£731 Million
|Total Cost of Debt per Pub||£50,000/pub/year
|Chief Executives Remuneration||£2 Million/year + Share Option Bonuses
|Advisors||Unusually for competing companies both Punch and Enterprise use the same accountants and same partner at that firm, Ernst and Young
1. Estate Holdings
The managed estate of Punch is largely Spirit Group. It is
significant that the managed estate has decreased by 1,191 pubs
since the same time last year and disposals and conversions to
tenancies continue as we speak.
Enterprise does not operate pubs and Punch does not want
to operate pubs.
Total revenues of £1,779 million are generated from
just over 15,000 tied pubs amounting to over £116,000 per
pub. On a 50/50 divisible balance method at review, taking into
account "wet rent", each pub would need to generate
profit before rent of nearly £250,000.
3. Beer/cider Sales to Tenants
|Sales||Cost of Sale
||Profit||% Profit on Cost
|Punch (August 2007)||£577m
Assuming that the volume discount realised by bulk purchasing
is, say, 30% more than that achieved by smaller owner-operated
pub businesses these two "pubcos" alone extract about
£375 million per annum from the pub sector by overcharging
for beer and cider. That is around £25,000/pub of so called
"wet rent" across their entire tenanted estate on beer
and cider alone, not including full tie revenues (wines, spirits
and soft drinks) and revenue from machines.
4. Profits on Tenanted Estates
||Profit Before Tax||Tax
Profits of over £1,000 million are generated by these
two companies from just over 15,000 pubs. Around £65,000
|Bank Loans||Corporate Bonds
The above is a simplified version of the complex debt models
employed by each company. Interest rates are marked to fixed margins
above base rate or LIBOR. Bank loans may be subject now to decreasing
interest rates as base rate falls although LIBOR is not falling
at the same rate. Many of the securitised bonds are on fixed rates
at 6% and above. In the case of Punch the weighted average cost
of debt in 2008 was over 6%. Enterprise notes that 89% of its
debt is fixed for 10 years at 6.5% so they will not benefit from
current low rates. Note the small amounts of cash held by the
6. Net Financing Costs for the year
These figures include redemptions, bank interest, bond interest,
new loans and some share buybacks in the case of Enterprise. Interestingly,
in 2007 Enterprise made great play of share buybacks totalling
over £600 million but took out new loans of over £600
million seemingly to finance this. A useful way for directors
to exit some of their positions in the company's shares.
The total financing cost for 2007 alone between just these
two "pubcos" is £731 million! This equates to £50,000
per tenanted pub per year.
John Moulton of Alchemy Partners last week estimated that
the entire debt burden of UK pubcos was in the order of £20
billion. At a similar 6% cost this equates to £1.2 billion
per annum in financing costs alone. Equivalent to £23,000/year
for every single pub in the UK whether it is owned by a "pubco"
7. Chief Executive's Shareholdings
|Ted TuppenEnterprise (2007)||2,600,000
|Giles ThorleyPunch (2007)||232,000
This does not take into share option schemes which I can
subject to further analysis if we want.
8. Chief Executive's Remuneration
|T TuppenEnt Inns(07)||£575,000
Mr Thorley's salary increased to £525,000 in 2008a
year when the company underperformed.
The above does not include further lucrative share option
schemes for all directors.
Total remuneration packages for the two companies for key
directors amounted to around £4.7 million not including all
pensions and share options packages.
9. Investment and Tenant Support
||Rent Subsidy||Additional Discount
The investment in the properties amounts to just £8,500
per property and this is an exceptional year. The normal average
expenditure per company per annum is £45 million and this
would equate to £5,600 per property. This reflects the high
burden of repairs placed upon the tenants. It is also important
to point out that the investment for Punch includes their managed
estate where they are responsible for all repairs. Accordingly
one would expect the figure attributable to the tenanted estate
to be significantly lower than £69 million.
The level of rental subsidy for the year amounted to just
£562.50 per pub for the year. The amount of additional discount
was just £775 per pub for the year.
10. Key Advisors
Both companies are audited and advised by Ernst and Young
in Colmore Row, Birmingham which does seem very strange for companies
allegedly in competition.
11. Common Shareholders
Goldman Sachs, Axa, Barclays and Lansdowne Partners are amongst
a raft of common shareholders although this isn't particularly