Langton Capital – 2019-08-20 – PREMIUM – Greene King bid, Brakspear, Eastern Med cuisine etc.:
Greene King bid, Brakspear, Eastern Med cuisine etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, with the announcement that CKA was to buy Greene King for 850p per share, we were almost immediately punished for suggesting that August was quiet and that there was no real news out there.
That’ll teach us but, for the moment, we’re a little short of time. On to the news:
GREENE KING AGREES 850p PER SHARE BID:
• Greene King, born in 1799, has agreed a 850p per share bid from Chinese property interests controlled by CK Asset Holdings. GNK shares rose 50% yesterday.
• Either the Chinese investor or the UK stock market had got the valuation wrong previously.
• The UK pub industry has faced some headwinds. Costs have risen, alcohol consumption has fallen, and confidence is fragile.
• And the sector is pretty much 100% UK-focused, meaning that it has been a natural magnet for Brexit-related worries.
• But recently, trading has been a little better, capacity has come out of the market and, in the background, pub companies have been expending capital carefully (accommodation etc.) perhaps in contrast to the splurge that has seen the casual dining market get itself into such a mess.
• Nonetheless, share prices have remained below their pre-2016 referendum levels. After bids for EI Group and now Greene King, these valuation levels may be called into question.
• The terms of the deal
• Greene King (d.o.b. 1799) has announced that it is recommending acceptance of an 850p per share cash offer for the company from a subsidiary of CK Asset Holdings Ltd, which is a Hong Kong investment company.
• CKA describes itself as ‘a long-term and strategic investor in stable, profitable and cash flow generating businesses that benefit from real estate backing.’
• CKA currently owns around 3% of GNK shares.
• In addition, existing GNK shareholders will receive the 24.4p per share final dividend announced for the year to 28 April. GNK shares went ex the payment on 8 August & the dividend will be paid on 13 September.
• The bid price of 850p represents a premium of around 51% to the closing price on 16 August. It values GNK’s equity at around £2.7bn and implies an Enterprise Value of around £4.6bn.
• The bid values GNK at around 9.5x historic EBITDA (to April 2019) or 10x post an interest rate swap adjustment.
• GNK’s directors are recommending the deal as fair and reasonable as advised by Citigroup and Rothschild & Co. GNK directors are irrevocably undertaking to accept the bid, though they only own 0.05% of the company.
• The purchase is subject to the approval of CKA Shareholders in Hong Kong. CKA’s directors will unanimously recommend that CKA Shareholders ‘vote in favour of the resolutions to approve and implement the acquisition’. CKA’s directors have only 0.013% of the company. In addition ‘CKA has agreed to procure that the relevant trustees of the Li family trusts provide to Greene King an irrevocable undertaking to vote in favour’. The Li trusts own 31.4% of CKA.
• Timetable & Conditions:
• The purchase is subject to approvals by both sets of shareholders, to the agreement of the European Commission and to the sanctioning of the scheme of arrangement by the court.
• The CKA circular should be published around 16 September and the deal is expected to complete during Q4 this year.
• Rationale etc.:
• CK Bidco says it has faith in the future of the British pub and says ‘Greene King, being a leading integrated pub retailer and brewer with strong real estate backing, is well positioned to capture the opportunities that lie ahead.’ It says ‘we are proud of our track record in the UK and our philosophy is to support strong management teams and provide investee companies with access to patient capital in order to create sustainable long-term value.’
• CK says it ‘greatly values the skills, knowledge and expertise of Greene King’s existing management and employees and therefore does not intend to make material changes with regard to the continued employment of the employees and management of the Greene King Group, including the conditions of employment or the balance of skills and functions of the employees and management.’
• Chairman of GNK, Philip Yea, says ‘the Greene King board is confident in the long term prospects of the business but believes this offer represents a good opportunity for shareholders to realise value for their investment at an attractive premium, while also ensuring the future success of Greene King for employees, partners, customers and suppliers.’
• CEO Nick Mackenzie comments CKA ‘understand the strengths of our business and we welcome their commitment to working with the existing management team, evolving the strategy and investing in the business to ensure its continued long term growth.’
• Mr Mackenzie took over as CEO of Greene King in May this year. He replaced Rooney Anand, who had been CEO for 14yrs and had been with the company for 18yrs. See Premium Email for Langton Comment, Unanswered Questions, Press Comment etc.
GREENE KING AGREES TO 850p PER SHARE BID: Greene King, born in 1799, has agreed a 850p per share bid from Chinese property interests controlled by CK Asset Holdings. GNK shares rose 50% yesterday. Either the Chinese investor or the UK stock market had got the valuation wrong previously. 20 Aug 2019:
• See also the facts of the deal outlined above.
• Either China or the UK stock market has got the valuation of asset-based UK pub companies wrong.
• The move is a vote of confidence in the UK, at least over the very long term. It is similarly a statement as to what the investors think about the current level of Sterling.
• There are obvious read-acrosses to Marston’s (the company most similar in its composure to Greene King) and Mitchells & Butlers. The share prices of M&B and Marston’s yesterday rose 6% and 9% respectively.
• There is a lot of money left in China yet to be spent.
• The move is what it is but it comes a bare couple of months after 14yr CEO Rooney Anand left the company and only a couple of months into the tenure of new CEO Nick Mackenzie. It is possible but surely unlikely that the deal was initiated and concluded in the short period since May.
• Credit to the the purchaser, the seller and the advisors as nothing had leaked out to suggest that this deal was in the offing. The shares rose 50% on the announcement.
• After the sale of Punch to Heineken and EI Group (was Enterprise) to Stonegate, the sale of GNK means that the three largest UK pub companies (representing perhaps a quarter of the entire industry) have been sold to private buyers in the last couple of years.
Other unanswered / unanswerable questions:
• Compatible skill sets? Running a managed pub business (perhaps less so a tenanted estate) is a very hands-on job. The value of the assets is dependent upon the performance of the operator. It may be hard to replicate the passion of a JD Wetherspoon from 6,000 miles away.
• Impace on customers? See comment on passion above. Running 2,000 plus pubs isn’t like running 2,000 vending machines (or even fast food outlets). Customer satisfaction is harder to engineer. Especially from afar.
• More pub closures? This is possible. If the deal is viewed through a property rather than an operating lens, some units may be sold for alternative uses. CK says it does not intend to initiate any material headcount reductions within the Greene King organisation as a result of the Acquisition, although it is expected that each of the Greene King non-executive directors will resign as directors of Greene King on or shortly after the effective date.
• When will it be ‘business as normal’? GNK has a raft of deals in the offing. Not major capital or company purchases, perhaps, but normal trading deals involving hiring staff, buying assets, refurbishing units etc. A period of shut-down would be human but the company will need to avoid this if it is not to lose ground to its competitors.
• Management hiatus? The directors will leave the company when the deal finalises. This will be a major opportunity for those occupying the management rung below board level. There may also be some outside hires. Getting any transition right is all important stuff.
• Focusses on Mr Li’s wealth, the recent travails of the pub industry, the shift away from alcohol, other deals in the sector etc.
• Little yet (but maybe more in the days to come) on read-across for other companies, other potential buyers of freehold assets in the UK etc.
GENERAL NEWS – PUBS & RESTAURANTS:
• JT Davies & Sons, the parent company for Brakspear, reports that it has increased its turnover during the year ending 31 December 2018 by 12%, to £31.8m saying this generated EBITDA of £8.7m, up 13% on the previous year.
• JT Davies profit before tax over the same period was £5.4m, representing a 12% increase on 2017.
• JT Davies says ‘sales growth came from the 13-strong managed house division and amounted to £3.2m, giving an annual turnover of £14.8m for managed houses. The turnover increase came from like for like sales growth of £0.9m, the full year growth effect from sites opened in 2017 of £1.7m and £1m from the opening of the Frogmill near Cheltenham in July 2018.’
• Brakspear adds ‘turnover in the tenanted and leased estate was level with the prior year reflecting a 1.6% increase in like for like trading volumes countered by the transfer of a site to the managed division at the end of 2017 and the sale of two sites in 2018, both to local pub operators, as part of Brakspear’s pub disposal programme.’
• Re the outlook, CEO Tom Davies says ‘our managed estate is developing nicely, despite cost pressures impacting the business, it seems at every turn.’ He says ‘our plan has been to continue to support our tenants and lessees, with the aim of helping them to build thriving pub businesses, whether food-led or community local.’
• Research from CGA and AlixPartners suggests consumers are favouring Middle Eastern and Eastern Med dishes over more traditional Italian, Indian and Chinese fare.
• The Caterer suggests that Cabana will initiate job cuts and closures after previous owner Jamie Barber bought it out of administration
• The Sunday Times says Lidl will oblige its suppliers to pay the cost of import tariffs if they wish to sell into its Irish units
• CEO of UKHospitality, Kate Nicholls has called on the Government to provide a greater degree of clarity for businesses and the economy in the event of a No-Deal Brexit. Nicholls said: ‘The Government has taken great steps to safeguard the rights of those EU citizens in the UK ahead of Brexit. Although the majority of staff in the sector are home-grown, businesses do need to look to overseas talent to augment their teams’.
• The eleven strong bar chain, Dirty Martini has seen its summer sales increase 12%.
• The management of the Leeds-based Thai restaurant group, Sukhothai have completed a partial MBO funded by HSBC.
• Salcombe Brewery Co has announced its support for the England rugby team with the launch of a special limited-edition beer, the Red Rode beer.
• Research from Kantar has found that at least two-thirds of Brits snack five or more times a week, KAM Media has reported.
• Ei Group has teamed up with the beer quality advocated Cask Marque in order to create a collection of new Great British Pub Ale Trails.
• Punch has announced the appointment of Robin Belither to its Operations Team. Clive Chesser, CEO of Punch commented: ‘ I am looking forward to welcoming Robin to the team. He brings with him a wealth of knowledge and expertise in the hospitality sector which will help us to further deliver our plans, adding significant value to our publicans running pubs across the UK’.
• CH&Co has acquired Gather & Gather and Creativevents from Mitie, a move that will increase the group’s revenue by £137m.
• International sales of Cognac have reached their highest level after five consecutive years of export growth. Research from the Bureau National Interprofessionnel du Cognac has found sales increase 6.9% last year to Euros 3.4bn.
• Darwin & Wallace has announced it will open its eighth site in Canary Wharf, London. Mel Marriott, managing director and founder of Darwin & Wallace, said: ‘Our eighth site is at a tremendous waterside location in the heart of Canary Wharf and marks another exciting chapter as we move east, continuing our aspiration to create uniquely designed bars with a home from home aesthetic that forms the perfect backdrop for socialising from morning coffee to nightcap and everything in between’.
• UK shoppers failed to pick up £228m worth of goods bought via click-and-collect online orders over the past year, according to Barclaycard. The research found that over 70% of shoppers in the UK chose click and collect, selecting the option twice a month on average.
• The Canadian ecommerce company, Shopify is now bigger than eBay and has its sites set on Amazon, sending the group’s shares up 150% since the start of 2019.
HOLIDAYS & LEISURE TRAVEL:
• The Singapore-based hotel group, RedDoorz has raised $70m in Series C financing, less than five months after it closed its Series B fundraise of $45m.
FINANCE & ECONOMICS:
• Rightmove has said that property sales have started to rise after Brexit uncertainty reduced transaction levels in recent years
• Sterling a little weaker at €1.094 and $1.213. Oil up a shade at $59.79. UK 10yr gilt yield up 1bp at 0.48%. World markets up yesterday, Far East up today.
• Brexit & politics:
o PM Boris Johnson has written to Donald Tusk saying the Irish backstop, which was put in place by his predecessor Theresa May, must be scrapped as it is undemocratic and unviable.
o The EU has said it will not do this. US Speaker Nancy Pelosi has said a trade deal with the UK would not get through the US House of Representatives if it threatened the Northern Ireland peace process.
o BBC says government report suggests legal school meal nutrition standards may need to be amended, or discarded, in the event of a no-deal Brexit.
o Michael Gove has yet to clarify what he means by ‘bumps in the road’ in the event of a no-deal Brexit.
START THE DAY WITH A SONG:
Yesterday’s song was Only You by Yazoo. Today who sang:
Step by step and day by day,
Every second counts I can’t break away
Leave no trace
Hide your face
RETAIL WITH NICK BUBB:
• MySale: Just over four years on from its IPO in London (which raised £40m for the company), today has brought the outcome of the “strategic review” from the struggling Aussie-based Online retailer MySale and the news that the group is launching a desperate £10m placing (of 500m shares at 2p each) to fund a move to an “ANZ- First” and an inventory-light model. At the close last night MySale was capitalised at only just over £7m and, although #MadMike cut his losses and sold out a couple of months ago, the embattled Philip Green and his wife are still holding a c20% stake (which they paid £48m for…) and it is not immediately clear whether they will be taking part in the fund-raising…
• The Grocer Watch: Ahead of the latest monthly Kantar/Nielsen grocery market share figures (for the 4/12 weeks to Aug 10th/11th), which come out at c8am this morning, the widely followed Grocer “33” weekly supermarket pricing survey in Saturday’s The Grocer magazine saw Asda win for the sixth week in a row and this time it was a convincing victory. The overall Asda basket cost just £51.64, £4.63 cheaper than second placed Tesco. Morrisons was third, on £57.55, Sainsbury was on £59.06 and Waitrose was off the pace, as usual, on £62.78. The separate Grocer “Mystery Shopper” weekly survey on Store Service and Availability was won by Tesco, for the fourth week in a row, as its 85,000 sq ft “Extra” superstore in Crawley came top, with 81 points out of 100.
• News Flow This Week: Apart from the Laura Ashley final results on Thursday, there is no other company news scheduled for this week, ahead of the Bank Holiday weekend.