Pub Companies - Business and Enterprise Committee Contents

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 writing.

  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 15,335 pubs
Total sales£1.75 Billion
Beer and CiderCost £616 Million
Sales £1.179 Billion
Profit £563 Million—85%
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
Tenant Support£1,300/year/pub
AdvisorsUnusually for competing companies both Punch and Enterprise use the same accountants and same partner at that firm, Ernst and Young

1.   Estate Holdings
Pubsleased/tenanted managedtotal
Enterprise7,7630 7,763
Punch7,572870 8,442

  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.

2.   Sales
Pubsleased/tenanted managedtotal
Enterprise£880m nil£880m
Punch£858m£703m £1,561m

  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
SalesCost of Sale Profit% Profit on Cost
Enterprise£602m £326m£276m85%
Punch (August 2007)£577m £290m£287m 99%

  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
EBITDAOperating Profit Profit Before TaxTax
Enterprise£512m £504m£263m£68m
Punch£490m£469m £217m£40m

  Profits of over £1,000 million are generated by these two companies from just over 15,000 pubs. Around £65,000 per pub.

5.   Financing
Bank LoansCorporate Bonds Securitised BondsCash Total
Enterprise£1,031m £1,185m£1,586m(£98m) £3,806m
Punch (2007)£43m £253m£4,754m(£6.5m) £5,050m

  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 two companies.

6.   Net Financing Costs for the year
Enterprise (2007)£392m
Punch (2007)£339m

  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" or not.

7.   Chief Executive's Shareholdings
Ted Tuppen—Enterprise (2007)2,600,000 around 0.52%
Giles Thorley—Punch (2007)232,000 negligible

  This does not take into share option schemes which I can subject to further analysis if we want.

8.   Chief Executive's Remuneration
SalaryBenefits BonusPensionTotal
T Tuppen—Ent Inns(07)£575,000 £23,000£345,000 £144,000£1,087m
G Thorley—Punch(07)£450,000 £335,700£54,000 £839,000

  Mr Thorley's salary increased to £525,000 in 2008—a 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
Capital Investment Rent SubsidyAdditional Discount
Enterprise£68m £2.7m£6.4m
Punch£69m£6.3m £6m  

  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 unusual.

October 2008

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