I haven’t posted in a while (my computer with all my data/spreadsheets wasn’t working) so I thought I would give a brief update of what is happening in the pub industry as there have been a few interesting developments. I am also planning, at some point, to post a deeper analysis of the rest of the industry outside of PUB/SPRT/ETI once I get through a few other companies.
Punch Taverns/Spirit – The spinoff has been completed and Spirit is now trading (SPRT, prospectus). Predictably, the demand for the remaining parts of PUB has been pretty weak and the share price has been sliding quite a bit (now around 12p). There has been quite a bit of trading in SPRT and it is staying around 50p but I am not sure how many shares have been distributed as yet. It looks like the whole operation has been fairly successful with no major surprises.
Overall, my view is pretty much the same. The outlook for the rest of PUB is pretty bleak (as I mentioned in the Portfolio update, I might get rid of my shares) and the outlook for SPRT is only slightly better. I think my main concern with SPRT was getting rid of the leased properties and if SPRT does manage to shift them, they won’t get a good deal. The market is still weak so this is still a concern.
An interesting, and more pessimistic, FT article highlighted the view of some City analysts (here). In particular, the pension deficits and provisioning are important factors that I haven’t mentioned before. Despite this, I am still fairly optimistic as, unless there is something fundamentally wrong with the majority of managed pubs, there should be, compared to competitors, some straightforward operational improvements to make. However, I don’t see myself adding significantly to my position is SPRT as there is a distinct possibility that the financial management of the company proves to be completely faulty.
Parliamentary inquires – I have attached a link to the video (here) from the last inquiry as the first 30 minutes or so really tell quite a lot about the current sentiment surrounding these companies. The transcripts from the last two meetings are here and here.
My reading of these past two meetings and the comments of Vince Cable and the Committee Chairman leads me to think that the pubcos have really run out of road and, it looks like, statutory regulation will emerge from the Committee’s latest report.
However, there are a few interesting things to say as although the outcome seems clear (or as clear as these things can be) the process which led to this stage hasn’t been. My general feeling is that the pubcos were hard done by in the last meeting. In particular, the Committee members seemed to keen to hear stuff that confirmed their view but ignored much that didn’t (and there was a bit). At the least, the level of respect shown to the two groups at the last inquiry was very noticeable. The most puzzling thing for me though was the level of criticism focused at Ted Tuppen of ETI considering that Punch (who were also present) seems, to me, to have been considerably more reckless in their pub acquisitions. I suspect that the source of this animosity is the left over from the previous inquiries where Mr. Tuppen appeared to question the intelligence of some members of the Committee. Unfortunately, it is still true that the campaign against the pubcos is running more on hearts than minds.
Either way, that is the way the game is played and the pubcos haven’t done their best in playing it (although one would think the money they coughed up for tenants would have gone some way to helping). It is difficult to say what the effect of statutory regulation will be. To me, the problem wasn’t regulation, it was a complete failure by potential tenants to actually think about what they were doing (sound familiar?). In this case, the potential is that statutory regulation just becomes a way to establish more freeholds (regardless, of the value created) and punish big companies (some critics appear to argue that size alone means the companies should be punished). And this is really the biggest worry investing in the sector not the supposedly broken business model.
Fundamentally, the business model isn’t broken. Like shipping, for example, the assets underlying a company like ETI are worth something. The company is threatened by its debt load (ETI recently got some financing which is either a sign of equity remaining or the last equity being carved up) and the poor liquidity of the sector, certainly there are a lot more pubs coming on the market in the near future, but nothing is broken. The company provides a function in acquiring pubs in good locations and giving people the opportunity to run them. There is perhaps something of an adverse selection problem as the only people who may come forward may be inappropriate tenants but this is something we don’t know. ETI is currently priced around all-time lows but it does seem quite possible (although maybe not probable) that the company will work through its problems (even considering my already bearish view on the industry). However, regulation is now a serious worry particularly as the figures driving it seem less concerned with helping the industry and considering new ideas and more concerned with reinforcing their views about the industry and serving special interests and populist causes.