Langton Capital – 2020-06-15 – PREMIUM – Restaurant Group, Cineworld, Escape Hunt, 2m rule, capacity etc.:
Restaurant Group, Cineworld, Escape Hunt, 2m rule, capacity etc.:
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A DAY IN THE LIFE:
So, are you dashing out to the shops today?
Or have you already been, so acute was your desire to buy a pair of shoes and a fridge or whatever because, presumably, you haven’t got any other footwear, your internet connection hasn’t been working for the last three months and you’ve been blacklisted by Amazon due to your dog’s horrible and persistent antisocial behaviour?
Just asking that for a friend or perhaps you’re like the rest of us, will continue modelling TU and F&F’s latest fashion ranges and do your non-food shopping in the food shops, maybe potter over to the High Street in a few weeks to see what’s going on?
And, if so, what future the High Street?
Anyway, that’s another one to ponder but, chez nous, we didn’t cut the grass over the weekend. Still too wet so have that joy to look forward to, maybe as soon as later today but we did get to build our nth flat-pack (simple construction, 1 man-hour. In your dreams) guinea pig cage where ‘n’ is a non-negligible number between five and ten. On to the news:
Follow us on Twitter at @brumbymark. On to the news:
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CVAs – RESTAURANT GROUP’S PITCH TO ITS CREDITORS: The Restaurant Group is proposing undertaking a Creditors’ Voluntary Arrangement and, to that end, it has circulated proposals to its landlord creditors. 15 Jun 2020:
• As we know, the Restaurant Group has announced that it is proposing to ‘reduce the size of its Leisure estate and rental cost base by the implementation of a company voluntary arrangement’
• The group has now made its proposals known in detail
• This will relate to ‘the statutory entity “The Restaurant Group (UK) Limited” (“TRG UK Ltd”) which principally comprises the Frankie and Benny’s estate.’
• TRG says ‘the arrangements will have no impact on the Group’s Wagamama, Airport Concessions and Pub operations.’
• We outlined last week that CVAs need to be seen as a last ditch solution for a business where the alternative is administration with a resulting larger loss for creditors
• This implies that the creditors would not benefit from cross-guarantees and have little or no access to companies within a group that may be valuable (or at least solvent)
• This is often the reason as to why various landlords may be treated differently
• A CVA is a wish-list on the part of the proposing company. TRG, for example, could, if successful, bring about 5yrs plus of potential organic restructuring in just a few weeks
• But this is clearly not without cost (to someone)
CVAs in context:
• We are aware of at least one proposed CVA that didn’t make it to the formal proposal stage. There will be others
• But, of CVAs that have got as far as the shareholders’ vote, we are not aware of any that have failed
• Like the barrister in a court of law, companies proposing a CVA will not (ideally) ask a question to which they do not already know the answer
• The proposing company must address a number of audiences including its creditors and its own shareholders as well as its staff, suppliers, the taxman etc.
The Restaurant Group:
• So much for the theory. TRG says it wishes to reduce ‘the current portfolio by exiting approximately 125 trading sites as well as seeking improved rental terms on a portion of the remaining trading estate.’ In addition, some 25 non-trading sites will be returned to landlords or be otherwise disposed of
• The group says post CVA ‘this will leave a remaining trading estate in the Group’s Leisure business of approximately 160 sites.’
• TRG has circulated its 214-page proposal to landlords. Creditors will vote on the proposals at a meeting on 29 June
The company sets the scene
• The CVA company ‘operates the leisure business of the Group…This comprises approximately 313 branded restaurants.’
• TRG says ‘prior to the COVID-19 pandemic, the Company was operating in a challenging business environment, with significantly reduced margins and a like-for-like sales decline of 2.8% during the 2019 financial year.’
• It says ‘the Company’s business has been particularly impacted by declining footfall, changing consumer preferences, rising costs, overcapacity in the market and the general downturn in the retail sector, all of which have affected the broader casual dining market.’
• It says the business was in ‘structural decline.’ The company had ‘commenced a formal rationalisation exercise’ and, since the Covid-19 crisis has forced the closure of its units, it has cut costs.
• TRG says ‘if the CVA is not approved at the relevant meetings, or is otherwise not implemented, it is very likely that the Company will enter into administration.’
• It says: ‘if this happens, the returns for Unsecured Creditors will be reduced.’
TRG’s proposed deal for landlord creditors:
• TRG says it does not intent to compromise claims from employees, suppliers, HMRC or the rating authorities. It says these counterparties ‘are considered critical to the continued trading of the Company’. Landlords will take the hit.
• TRG has split its restaurants into four categories. Category 1, it is proposing no change to terms other than to move to monthly terms and smooth the payment or rent arrears (73 units). Some 70 of these units benefit from guarantees from the parent company TRG PLC.
• Category 2 (28 restaurants) and category 3 (62 restaurants) will see lease terms softened including material rent reductions and category 4 (148 restaurants) will be surrendered and exited with no dilapidation liability. Category 4 landlords will forgive all rent arrears
• The company estimates that Category 1 landlords will get paid in full. Category 2, 3 and 4 landlords will suffer a 10x greater loss in the case of an administration vs a CVA. Full details are given in Schedule 9.
• TRG says that, in an administration of the leisure business, unsecured creditors would receive only £600k of the c£268m owed to them, or 0.22%. It says landlords participating in the CVA should receive c10x that much.
• To sweeten the pill, TRG says that compromised creditors will be able to participate in a ‘Profit Share Fund’, which it says ‘…will comprise an amount equal to 35% of the amount (if any) by which EBITDA (of the Company) for the 2021 financial year exceeds the Threshold EBITDA for that period, being £25,000,000.’
• There are no guarantees as to profitability.
• TRG points out that it has a book value of £198m of assets subject to a floating charge. It says that, within this, the £40.4m of leasehold property, plant and equipment, has a realisable worth of only £150k.
• In this market (and remembering the administration of Patisserie Holdings) this may not be far wide of the mark. It does go to show the value of freeholds. TRG is assuming only a c10% diminution in the value of the freehold assets over which creditors hold a floating charge
• Stock over which there is a floating charge, TRG says, is worth 70% less than it is in the books at.
• This speaks to the importance of the Going Concern principle. The latter is a binary thing and, as the numbers above suggest, valuations may swing materially if a unit is no longer to be operated.
• Fund raises. Who raised what and when and at what price / dilution for existing shareholders?
PUB & RESTAURANT NEWS:
The 2m rule. Mood music shifting noticeably:
• The press has been ‘seeded’, scapegoats are being lined up and a review is to be commissioned. It’s beginning to look very much as though the 2m rule is going to be binned.
• A review is underway, but PM Boris Johnson has said that the 2m rule will not be changed before 4 July.
• The Mail on Sunday reports that PM Boris Johnson has commissioned a review into the 2m as he is under pressure to scrap it.
• The review should be completed by 4 July. This has the look of a climbdown about it but, as 1) 1m would be fantastic news for hospitality and 2) the PM will now have the reviewers and his own backbenchers to blame if it goes wrong, neither the industry nor Mr Johnson are likely to object if the 2m rule is dropped some time before pubs reopen.
• The Sun has quoted the government’s chief scientific adviser Sir Patrick Vallance as saying that the 2m rule is a ‘guide based on risk rather than a rule.’ This is more than semantics. There is some hope that the 2m rule will have been relaxed on 4 July, the earliest date on which pubs are to be allowed to reopen.
• The Sun says ‘businesses will be able to allow staff and workers closer together but only if they can show they have taken measures to lower the risk of catching coronavirus.’ A bit of guidance in this are from official sources could be useful. The sun quotes a ‘Whitehall source’ as saying that the final decision was a political one. Speaking of the scientists, the source says ‘they give the evidence as they know it and then it’s a policy decision. It’s a judgement call about probability.’
• The investigation into blames shifting (see above and below) might have to come later. For the moment, the industry will be hoping that 1m is ‘enough’.
• The scientists are saying this is a ‘political judgment for the prime minister to make’ and politicians are saying they are ‘driven by the science’. Both groups could be waiting to see if the moves, whatever they turn out to be, are successful. At that point, there may be claims of authorship.
• The Times says: ‘the world has panicked and the British government has panicked worse than most.’ It says, in the wake of evidence showing that the impact of Covid-19 on both the economy and mortality has been worse in the UK than elsewhere that ‘politicians will be blamed for everything, and who can doubt that political leadership has been a shambles?’
• The FT rams it home that in quoting Fuller’s Simon Emeny, who says ‘the difference between two-metre social distancing and one-metre social distancing is the difference between 30 per cent of our estate and 75 per cent of our estate opening.’ Young & Co, which does not intend to open sites until early August, has said it will open fewer if the 2m rule has not been abandoned before then.
Other Covid-19 issues:
• Non-essential retail outlets can open from today. A YouGov poll commissioned by The Daily Telegraph has suggested that a half of shoppers will stay away from retail outlets and four in ten consumers will spend less than they would otherwise have done.
• Soho Estates boss John James has said ‘we will have a ghost town for a couple of years. We always thought that having independent traders was our strength as a property company, but now, of course, it is our weakness because they’re all small businesses and they’re really vulnerable to this pandemic.’
• James is calling for the pedestrianisation of streets and a summer festival to help boost trade. James tells Property Week ‘a restaurant with 60 covers can’t open with 20 covers. All you’re doing is opening the door to the bills. Twenty people won’t cut it for them, so they won’t open and eventually they will run out of money.’ James reminds readers that June’s rental payment for Q3 is looming up on 24th of this month.
• James says ‘lots of people are asking us for turnover-based rents, which I don’t want to do, not because I don’t want to help them but because I don’t want to be too involved with running somebody else’s businesses when I’ve got my own to run.’
• CGA reports that ‘Britain’s hospitality sector was responsible for nearly a quarter of the GDP losses felt by UK business in April, highlighting the urgent need for the sector to be allowed to re-open.’ With GDP down 20.4% in April, it points out that hospitality income was down by nearly 90%.
• The BBPA says something similar when it says ‘the Government to urgently confirm a definitive date when all pubs can re-open as well as publish the final safety guidelines the sector needs to be ready for reopening.’
• Pubs will need three weeks or so to tidy up, order beer, take staff back on and cut the grass in the beer garden. Brewers need to brew. This is a chemical process and can’t be speeded up orally.
• The BBPA says to `save the summer` some publicans and brewers are having to take a gamble as to how the government will view things three weeks hence. The BBPA’s Emma McClarkin says ‘we have made it clear, our sector needs at least three weeks notice in order to get ready to re-open – that deadline is Saturday 13 June. The situation [the lack of firm guidance] has left us with no choice but to take the initiative and lead the preparations to get pubs ready to re-open and get Britain brewing again.’
• SIBA (the Society of Independent Brewers) says 84% of its members expect the Coronavirus pandemic and subsequent social distancing measures to have a lasting negative impact on their business. Presumably the other 16% didn’t know because it’s hard to see how any would expect it to have a positive impact.
• SIBA says 80% believe the Government are not doing enough to support small breweries. Hindsight is a wonderful thing but, as stats are beginning to suggest that the economic damage in other countries could be less severe, SIBA’s members may have a point. Some 90% of SIBA’s members believe they will lose market shares to the major brewers in the coming months.
• See also the APPG report on tourism under Hotels & Leisure Travel below.
The new world:
• CGA says it has ‘estimated there would be an overall reduction in the number of pubs, bars and restaurants of some 20-30%, but this could be significantly worse if revenues continue to be affected.’
• It says ‘the UK’s hospitality sector employs over 3 million people and is a huge generator of revenues for the Government. Reopening is as soon as possible is vital not just for these businesses, but to enable the whole economy to be able to recover.’
• Non-essential shops are opening for the first time in three months as we write. A lot of ink may be expended on ‘how Monday went’ but, as it is a slow day as a rule, we would consider a week’s trading (including a weekend) at least will be needed before we can begin to consider just how the consumer is reacting to this further easing of the lockdown.
• Moody’s has reported that the merger of Just Eat Takeaway.com and Grubhub Holdings is ‘credit negative for the US online meals delivery industry because it will increase competition and diminishes the likelihood of a rapid improvement in the industry’s profitability.’
• Moody’s says ‘Just Eat Takeaway has a track record of aggressive market share growth and leveraging profitability from core markets to invest in its brand and fuel growth in new markets.’
• Richard Caring has told the Mail on Sunday that thousands of businesses and their employees were in the ‘eye of a storm’. He says they will not be able to survive with 2m distancing. He says ‘I don’t think people can see it yet, but everyone in hospitality is beginning to realise they will have to make heavy cuts.’
• The Heineken family is reported to have acquired a 10% stake in award-winning premium tonic and mixer brand Double Dutch Drinks.
• Admiral Taverns is to offer its tenants tapered rent support from reopening all the way through to April next year.
• Robinson’s Brewery is to begin tapering its rent discounts from July.
• BJ’s Restaurants in the US has reopened dining rooms in 178 restaurants across 24 states.
• Oakman Inns CEO Peter Borg Neal has said that a large number of pubs will never reopen with two-metre distancing rules in place (see above)
• Retailer All Saints is reported to be considering a CVA.
• Which magazine says a US trade deal could pose the greatest risk to food safety since the mad cow disease crisis 20 years ago if chlorinated chicken is allowed into the UK. Boris Johnson said in his election manifesto the UK would ‘not compromise on our high environmental protection, animal welfare and food standards.’
• The Guardian reports that over a third of employees in some towns in Britain have been furloughed
• The UK wine industry says that the price of wine in the UK will rise post 31 December
HOLIDAYS & LEISURE TRAVEL:
• Spain is to allow UK holidaymakers in from 21 June but says ‘this does not mean that there may not be another change if the epidemiological situation in Britain requires this.’
• The All-Party Parliamentary Group (APPG) for Hospitality and Tourism has reported on the Covid-19 crisis saying that cutting tourism VAT, overhauling business rates and putting a Bank Holiday into October could help hospitality.
• The report states a lot of what we already know, hospitality hit hard, impact will linger etc but adds international arrivals could be down 30% this year and only 11% of hospitality businesses have been able to operate ‘normally’ (though heaven knows how).
• The APPG says urgent action is required on rents and adds the Government should reconsider the 2 metre social distancing rules.
• A BVA-BDRC survey suggests only 4% of UK adults now intend to take an overseas holiday by the end of September. On average, Britons expect to next travel abroad in around 9mths time. The desire to travel appears to be resilient but few would-be travellers wish to spend time in quarantine or find themselves stranded in airports etc.
• The Global Business Travel Association has said the UK quarantine rules are ‘a killer blow to a sector struggling for survival’.
• Transport secretary Grant Shapps has said that the quarantine rules will not be reviewed until the end of the month.
• UK residents will not be allowed to visit Greece until 30 June at the earliest the country’s tourism minister has said.
• The WTTC says that tourism has been responsible for around a quarter of jobs created globally in the last 5yrs. That will have changed in recent months. Greece, Italy and Spain will have been amongst the most-impacted countries in Europe.
• Contiki has reported that 70% of millennials would like to travel before the end of the year.
• MPs have said that BA’s attitude towards its proposed staff layoffs ‘falls well below the standards we would expect from any employer, especially in light of the scale of taxpayer subsidy, at this time of national crisis.’
• The use of face masks on public transport in England is now compulsory.
• Cineworld is pulling out of its agreement to buy Canadian cinema company Cineplex on Friday saying that Cineplex had suffered a ‘material adverse effect’.
• Cineworld says it ‘has become aware of certain breaches by Cineplex Inc. of the arrangement agreement relating to the Acquisition. In addition, a material adverse effect has occurred with respect to Cineplex. As a consequence of these matters and Cineplex’s unwillingness to cure the breaches, Cineworld has notified Cineplex that it has terminated the Arrangement Agreement with immediate effect. The Acquisition will therefore not proceed.’
• Cineworld adds ‘Cineplex claims that it has not breached the Arrangement Agreement and that a material adverse effect has not occurred. Cineplex has also separately alleged that Cineworld has failed to comply with its obligations under the Arrangement Agreement relating to pursuing the approval of the Acquisition under the Investment Canada Act.’
• Cineworld counters that it ‘has complied with all of its obligations under the Arrangement Agreement and it is entitled to terminate the Arrangement Agreement. It will therefore vigorously defend any allegation to the contrary.’
• Escape Hunt on Friday announced that it was to place around 46.6m shares at 7.5p and issue £0.34m in convertible loan stock in order to raise up to £4m. The company says £3.5m will be raised via a placing and up to a further £0.5 million via an open offer on the basis of 1 Open Offer Share for every 4 Ordinary Shares held on the Record Date.
• Escape Hunt says it will use £2.5 million to fund the roll-out of further owner-operated sites. approximately £0.7 million for general working capital purposes and says ‘the balance of approximately £0.6 million [will be used for] for operational improvements. The group intends to ‘open a further 5 – 6 UK owner operated sites within 12 months of the Fundraising and the Directors perceive that property market conditions should offer highly attractive opportunities.’
• Outdoor adventure company Go Ape is to reopen after having secured funding from the Coronavirus Business Interruption Loan Scheme
• Adult Gaming Centres have been told they cannot open today alongside non-essential retail
FINANCE & ECONOMICS:
• The ONS reported on Friday that the UK economy shrank by 20.4% in April compared with the same month last year. The ONS says ‘in April, the economy was around 25% smaller than in February.’
• The NIESR says ‘around a quarter of GDP is lost when the lockdown is fully in place. The latest ONS estimate represents a record monthly decline for UK GDP, with all sectors experiencing record falls. However, the economy now appears to have bottomed out, as recent survey evidence suggests an easing in the rate of contraction in the manufacturing and services sector.’
• The RICS says its measure of house price movements hit a ten year low in May with a reading of minus 32 (positive over negative moves) compared with minus 22 in April.
• Michael Gove says UK will not extend Brexit transition mechanism. Aren’t we possibly taking on a bit much here?
• Sterling weaker at $1.2517 and €1.1113. Oil lower at $37.58. UK 10yr gilt yield up 2bps at 0.21%. World markets mixed Friday, Far East down today & London set to open down around 150pts as at 7.30am.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The slump in April GDP reported on Friday was the front page story in the FT (“Johnson pressed to relax 2-metre rule after economy collapses 25%”) and the other Saturday papers also focused on the economic crisis: the stark headline in the Telegraph Business section was “Britain’s biggest ever collapse in GDP wipes out 18 years of growth”, whilst the Times ran with the front page headline “Get out and shop, PM to tell Britain” (noting that Boris will visit a High Street on Monday, to encourage shoppers to help revive the battered economy).
• Saturday’s Press and News (2): In terms of Retail news, the main talking point was the late news on Friday evening that #MadMike’s Frasers Group has bought a 5% “strategic” stake in the German fashion brand Hugo Boss. There was no Editorial comment on the move, but the Telegraph noted that Frasers bought a 12.5% stake in Mulberry back in February, whilst the Times flagged that Sports Direct had, in vain, asked the Government to allow it to open its stores to NHS workers a day early…The Times also highlighted the bumper trading news from Games Workshop on Friday, flagging both that it intends to repay recent Government subsidies where possible (“”We’re giving back our furlough cash””) and that the business had been boosted by the news that “Superman” actor Henry Cavill had spent his quarantine time painting Warhammer miniatures.
• Saturday’s Press and News (3): Ahead of Monday’s reopening of non-essential shops in England there were plenty of features on how social distancing will change the experience: the Telegraph looked at how John Lewis has prepared in its Kingston store (“John Lewis staff rehearse their Covid-ready duties before customers return”) and also had an article about how Savile Row tailors are adapting to the bleak new situation, whilst the Times had a feature on how joyless shopping may be in the future (“Shopaholics step out into strange new world”), with a survey saying that 20% of people will never enter a clothing store again…Finally, the stockmarket reporter of the FT, Bryce Elder, penned another interesting column about the indiscriminate rally in the stockmarket (“Retail exuberance does not explain the rally in stocks”), noting that it is not just private investors driving the “dash for
• Sunday’s Press and News (1): There were some bizarre headlines on the front pages of the Sunday papers: the Sunday Times went with “PM scraps plan to make gender change easier”, whilst the Sunday Telegraph ran with “Ten years in jail for protesters who desecrate war memorials” and the Mail on Sunday had the nerve to ask “What has become of the tolerant Britain we love?”…
• Sunday’s Press and News (2): In terms of Retail news, the Sunday Times had several stories on the front page of its Business section: Matalan is trying to sell its HQ freehold for c£29m to avoid the founder John Hargreaves having to plough more money into the business, John Lewis is preparing to claim money from the Treasury for the staff it had to furlough in April and Boohoo is facing another shareholder revolt over executive pay at its upcoming AGM. The Sunday Times also highlighted the problems that very small shops like Richer Sounds will have in processing customers in the future and also looked at how the healthfoods business Holland & Barrett adapted to the pandemic (thanks to an Online boom and strong sales in local High Street stores), whilst on its News pages the Sunday Times had a handy list of all the stores reopening tomorrow and a look at how Harrods will offer a
• Sunday’s Press and News (3): In terms of all the comment columns in the Sunday papers, we would, as usual, highlight the thoughtful column by the Sunday Times Economics correspondent David Smith (“We need imagination on the long road back for jobs”), in which he said that a range of responses will be needed to stop a surge in unemployment this autumn and that “there is no magic bullet”. We would also give a shout out to the columns by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“Unbalanced Britain needs tax cuts to revive its weakened economy”), in which he noted that hopes of a V-shaped economic recovery look very fanciful and by the veteran Economics Editor of the Observer, William Keegan (“Battered Britain is in no state to withstand no-deal”).
• Today’s News: The Sky News scoop that David Tyler, the embattled non-exec Chairman of the beleaguered shopping centre landlord Hammerson, is to be ditched in favour of one Robert Noel (who has only just stood down as CEO of rival Land Secs) has been confirmed by the company. With the Hammerson CEO, David Atkins, already on the way out, it has been left to Gwyn Burr, the senior non-exec, to say that “Rob brings with him vast experience of the property industry which will help accelerate the Board’s ambitions to put the company back onto a stable footing”. Interestingly, Hammerson also say that a non-exec director has been appointed on behalf of Lighthouse Capital, the South African investor that has built up a 15% stake in Hammerson…
• News Flow This Week: Apart from Royal Ascot…the highlight of this week is the re-opening of “non-essential” shops in England today (including the delayed opening of the new Primark in the Trafford Centre in Manchester), but there is plenty of company news scheduled. There is an update from Joules tomorrow, whilst Wednesday brings the Boohoo Q1 and the Kingfisher finals following on Wednesday. On Thursday we get the finals from New River (the community shopping centre and pub landlord) and the Ted Baker EGM (to approve the recent rescue deal), with the ONS Retail Sales figures for May and the Boohoo AGM following on Friday.