Langton Capital – 2021-02-01 – PREMIUM – Marston’s, consumer confidence, Diageo, Bourne Leisure, holidays etc.:
Marston’s, consumer confidence, Diageo, Bourne Leisure, holidays etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Langton was considering postcodes over the weekend.
Apropos of nothing, really, except that, whilst we are in YO19, the local pub, which is perhaps 200yds away, is in YO10.
Of course, the border must be somewhere but, when Googling YO19, it becomes obvious that it has a spit of land, specifically, it looks like, to include our house and is two chunks of non-contiguous territory, separated by the upstart YO10 and bordered by YO8, 23, 31, 32, 41 and possibly others.
No obvious numerical sequencing there, it would appear.
But it gets stranger because, if you have a glance at the Elvington Air Museum, the still-functioning airstrip where Richard Hammond had his famous crash, it’s clear that any aircraft trundling down the runway start in YO41, moves into YO10, then passes through a strip of YO19 and then it’s back into YO10 again.
And, if it were to overshoot the runway, not advisable given the damage that would be sustained via impact with hedges, random haystacks, farmers’ cows, etc. it would be back in YO19 again before its engines had a chance to fall off.
Anyway, though we’ve never felt the need to post a letter to an aircraft whilst it was moving, quite why any one single 1,000yd runway should be in four different postal zones, we can’t understand. Maybe the cartographer had hiccups. On to the news:
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MARSTON’S – UNSOLICITED BID APPROACH:
Consideration of the position & what happens next?
Marston’s announced on Friday that it had received an approach from Platinum Equity Advisors and our comments thereon are set out below:
• In a short statement, Marston’s confirmed that, on Friday, it had ‘received an unsolicited non-binding proposal from Platinum Equity Advisors…regarding a possible cash offer for the entire issued, and to be issued, share capital of Marston’s.’
• It said: ‘the Board will evaluate the Proposal with its advisers and a further announcement will be made in due course.’
• It cautions, as is standard practice in such situations, that ‘there can be no certainty that any firm offer will be made for the Company, nor as to the terms on which any firm offer might be made.’
• Bloomberg had broken the news at around 10.30am. Marston’s shares moved by up to 30%, and the company made its announcement regarding the approach at 11.24am.
• Under Takeover Code rules, Platinum now has until ‘5pm on Friday 26th February 2021, being 28 days after today’s date, to either announce a firm intention to make an offer for the Company…or announce that it does not intend to make an offer.’
• Punch Taverns, Greene King and EI Group (Enterprise Inns) were purchased in recent years, the latter two companies not long before Covid-19 changed the near-term outlook for the sector materially.
• Marston’s has secured its financial position via its JV with Carlsberg (to form the Carlsberg Marston’s Brewing Company) and has gone on to secure leases on a portion of the SA Brain estate via an innovative, capital light, deal
• The rationale for Platinum’s approach has not been made clear.
• But moves by other PE houses or family offices to acquire freehold-based estates has shown that there is significant perceived value in the sector.
Langton Comment: Bargain hunting?
• There may be 10,000 or more pub and restaurant leases now going cheap. In fact, many may come ready-fitted with fixtures & equipment and some will have reverse premia.
• But there are few freehold bargains to be had.
• This for the very good reason that, whilst the downside valuation on a lease (with its 25yr, upward only rent structure) can be large (certainly much more than 100%), this is not the case for freeholds.
• Owners know this, would-be buyers know this and, perhaps importantly, creditors and finance-providers know this.
• Hence, whilst liquidity (which Marston’s has dealt with under nearly all scenarios via its Carlsberg JV) can be an issue with freehold owners, valuation most often isn’t.
Langton Comment: So, where to from here?
• We do not believe freehold assets can be (or need to be) sold cheap. We think that all would-be parties to the above potential transaction know this.
• We may be wrong, of course, but, if the point above is correct, then any valuation for Marston’s should, arguably, be:
o Based, at least in part, on a pre-Covid price.
o Less the £m cost (as a one-off) that the pandemic has caused (not yet ascertainable but the current burn rate is c£3m to £4m per week).
o Plus, some recognition that the Carlsberg deal has crystallised value.
o Plus, the synergy benefit-adjusted capitalised excess of cash-flows from the brewery JV over what the stand-alone business would have produced
o Plus, something for the Brain’s deal
• A buyer (and the seller) may debate how much the market going forward will be a) worse because of ongoing cleaning, distancing & confidence issues and/or b) better because supply will be reduced
Langton Comment: The current situation:
• Marston’s can and should demand a full price for agreement. Whether that works or not for Platinum’s models given its cost-of-capital calculations is not yet clear.
• Platinum may need agreement to get access to Marston’s books. Without such access, it would be flying blind. It may not be able to fund its potential purchase or feel able to make such a significant purchase without seeing what it is buying.
PUBS & RESTAURANTS:
• The behaviour of the consumer will be critical in determining the future of the hospitality industry.
• CGA, in its 2021 Hospitality Consumer Forecast, has said that ‘consumers are badly missing hospitality experiences but understand that going out to eat and drink won’t return to normal for a while yet.’ The survey shows 77% of consumers ‘are worried that life won’t return to normal in 2021.’
• On a brighter note, 59% of respondents said ‘they can’t wait to go out again, and four in five hope to get back to venue within a few weeks of reopening.’ The numbers are broadly in line with sentiment ahead of reopening during the first lockdown in Q1 last year.
• Food may outdo drink sales.
• The number of people saying that they will visit a restaurant or a café ‘in the first weeks’ after the lockdown is lifted came in at 32% and 31% respectively. Slightly fewer people, around 25%, said they would visit pubs over the same period.
• This may be impacted by the weather (and sport). The evidence post the first lockdown seemed to suggest that wet-led venues performed relatively well.
• CGA says ‘consumers have sorely missed going out to eat and drink, and these numbers show the enduring appeal of restaurants, pubs and bars.’ It adds ‘people are going to have to wait a while yet, and some will need reassuring, but when venues are able to open their doors we can look forward to a steady as well as safe return of guests.’
• CGA says ‘it’s very encouraging to see signs of increasing confidence in sectors like nightclubs and bars that have been so badly hit by lockdowns. Given that these venues have been closed the longest of any sector, it’s no surprise to find that their users are among the keenest to get back after lockdown, and they could provide a desperately needed injection of spending when they can safely return.’
• Time will tell but this may suggest that younger customers, who are the larger part of such venues’ clientele, may not be ‘getting out of the habit’ of going out.
• A delivery-Valentine?
• There won’t be any sit-down meals but CGA suggests that 20% of consumers may buy takeaway or delivery food & drink with 58% (of those who say they will be celebrating) saying they will ‘treat themselves to more expensive food than they usually have at home, and 44% will buy more expensive drinks and drinks brands than usual.’
• More evidence of pent-up demand?
• CGA says ‘consumers have been really missing the drinks they enjoy in the On Premise – especially serves like cocktails that aren’t so easily achieved at home.’
• The latest Deloitte UK consumer confidence tracker says that consumer confidence fell by another percentage point to minus 17% in the last three months of 2020. It says most of its measures were below levels of a year ago. Personal finance was the one positive area. Deloitte says ‘the easing of lockdown restrictions, coupled with vaccines being more widely rolled out and strong personal finances, should unleash pent-up demand to spend.’
The risk of false-starts:
• Overpromising has been a feature in some areas. The latest Hospitality Leaders’ Poll conducted for the MA and its sister publications says that 76% of operators would prefer to open later in the year if it meant they could do so with fewer or no restrictions on trading in place.
• The survey reports that 52% of operators have not put in place enhanced takeaway or delivery options with 42% saying they had made moves in this direction and 6% saying that they already offered these services.
Optimism fading a little:
• The Hospitality Leaders’ Poll finds that the percentage of operators who are ‘not confident in the future trading of their business’ rose to 42% from 38% a week earlier. The number who are ‘quite confident’ fell from 46% to 37%. In a move that suggests some polarisation, the percentage of those who are ‘confident’ rose slightly from 13% to 15% as did those who answered ‘very confident’, up from 3% to 5%.
• Dry January is now just a memory.
• KAM Media, however, says that the future for no and low alcohol drinks is bright. It says ‘2020 appears to have been the year in which low & no has entered the mainstream. Awareness has sky-rocketed.’
• New York City aims to reopen indoor dining at 25% capacity starting Valentine’s Day.
• The industry’s showdown with landlords continues to approach. The Mail picks one example and says ‘The property firm owned by mogul Asif Aziz – who controls an array of central London properties including the Trocadero complex – has filed claims against its tenants even though they say they cannot afford the rent while closed under Covid lockdown rules.’
• As the rules stand, it will be legal to evict tenants after 31 March.
• Loungers’ Alex Reilley says re the above this is ‘sadly far from the only landlord who is unwilling to engage & unprepared to accept anything less than rent paid in full. The gov need to understand that at the 1st available opportunity some landlords will hit the nuclear button.’
• The Sun says ‘desperate pubs and restaurants must reopen on April 1 to take advantage of the Easter weekend and avoid pending disaster.’ It is quoting comments made by industry bodies. It quotes Labour research saying some ‘650,000 hospitality firms are at risk of collapse as they burn through cash reserves’.
• UKH, other industry bodies and many operators are calling on the Chancellor of the Exchequer Rishi Sunak to extend 5% VAT and to further delay the reimposition of business rates.
• Goldman Sachs has opined that the Bank of England’s cheap loan plans have failed to help small businesses. It says the take-up rate has been low.
• Marston’s announced on Friday that it had received an “unsolicited” takeover offer from US private equity firm Platinum Equity Advisors. See notes above.
• Moody’s has commented on Diageo’s results saying that the ‘Moody’s-adjusted leverage increased slightly to 4.2x from 4.1x last June, a credit negative.’ It says, however, that ‘leverage increased less than we expected (we had expected 4.5x based on our previous forecast). Indeed, Diageo’s operating performance is resilient in the currently very challenging trading environment.’
• Moody’s continues, saying ‘the company managed to post positive organic sales growth during the six months to December after rapidly diverting sales to the market channels that remained open during the lockdowns, thus offsetting the closure of on-trade and travel retail. The performance was particularly resilient in North America, Diageo’s largest market, where consumers shifted their purchases of spirits to homes from restaurants and bars.’
• The Distilled Spirits Council of the US has said that sales of spirits boomed in the US last year, despite restaurants and bars being closed for much of it. Volumes rose by 7.7% to a cash value of $31.2bn for the year. The sales in the Ready To Drink category rose by 39%.
• Australian wine exports to China are reported to have dropped by 98%.
• Diageo is to partner with other spirits producers and online retailers, e-commerce and delivery platforms to set up new standards for online sale of alcohol
HOTELS & LEISURE TRAVEL:
• Blackstone has confirmed that it has agreed to acquire Bourne Leisure, ‘a premier UK holiday company. The Harris, Cook and Allen founding families are co-investing alongside BCP and BREP and will together hold a significant minority stake in the business.’
• Blackstone says ‘the Company is a leader in the UK domestic holiday market, employing over 16,000 team members, hosting 25,000 holiday-home owners, and attracting 4.5 million guests to 56 sites across the UK every year. It operates through its three brands, Haven, Butlin’s and Warner Leisure Hotels. Haven is the largest UK caravan operator with 38 holiday parks and 2.5 million visitors a year.’
• Blackstone says ‘we are long-term believers in the UK and are delighted to invest meaningful capital, despite recent uncertainty, to support the recovery of a COVID-impacted industry, and wider local economies.’ Bourne Leisure CEO Paul Flaum says ‘today marks the beginning of an exciting new chapter for Bourne Leisure, for our guests, our holiday home-owners and our team members.’
• Flaum adds ‘we are delighted to be partnering with Blackstone who have demonstrated a real understanding of our business and sector, and we look forward to working together to deliver on our exciting plans for the future. We are also delighted that our founding families will continue to be involved in the business through their significant family minority co-investment. We see compelling opportunities to grow Haven, Butlin’s and Warner Leisure Hotels, as well as benefit from the increasing demand for UK domestic holidays.’
• The Foreign Office has made clear that “going on holiday is currently illegal” in a new social media campaign reports TTG.
• TUI has cancelled its Florida programme until at least the beginning of May.
• STR reports US hotel profitability fell 84.6% in 2020. It had started the year relatively well. December was down 100.6%.
• Sportech has announced that it is to sell its Bump Worldwide Inc business to Canadian Bank Note Company, for gross consideration of CN$10 million. The company says the sale is anticipated to complete during Q2-2021 and net proceeds will create potential further investment capital for the Group’s Connecticut sports betting ambitions and retail gaming business.’ The company says ‘in the year ended 31 December 2019, Bump generated a loss before tax of £0.15 million. As at 30 June 2020, Bump had gross assets of £0.85 million.’
• Health secretary Matt Hancock has said that the summer could be ‘happy and free’ after the most vulnerable are vaccinated against Covid-19. Hancock had previously warned that people should not book a summer holiday abroad.
• Sky reports ‘lenders to Virgin Active are preparing for a fight over the future of one of Britain’s biggest gym chains as its owners draw up a radical blueprint to help it survive the pandemic.’
• Sky goes on to quote ‘City sources’ as suggesting that ‘Brait, the company set up by one of South Africa’s most prominent businessmen, was expected to present a formal restructuring plan to Virgin Active’s lenders in the coming weeks.’ Brait owns around 80% of Virgin Active.
• Virgin Active says ‘we are now managing the further impact from this evolving situation around the world, including second lockdowns in the UK and Italy. We are in discussions with all our stakeholders, and with their support we look forward to getting back to business as usual across all our territories, enabling the business to benefit from global trends towards health and wellness which are accelerating as a result of the pandemic.’
• Facebook has launched Facebook News in the UK.
FINANCE & MARKETS:
• The Telegraph reports that ‘Europe’s [economic] recovery at risk from vaccine shortages.’
• A letter was signed by the CBI, the British Chambers of Commerce, the manufacturers’ group Make UK, the Federation of Small Businesses and the Institute of Directors has said that firms face “substantial difficulties” at UK ports since Brexit.
• Business Secretary Kwasi Kwarteng says a post-Brexit review of workers’ rights will not now go ahead.
• Silver has risen in price as parts of the Reddit crowd turned their attention to commodities.
• Sterling stronger at $1.3743 and €1.1328. Oil lower at $55.36. UK 10yr gilt yield up 3bps at 0.29%. World markets lower on Friday but Far East up in Monday trade & London expected to open up around 15pts.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front-page headlines of the Saturday papers were dominated by the extraordinary row between the UK and the EU over Covid vaccine supply, eg the Guardian went with “EU backtracks over Brexit clause amid vaccine crisis” and the Times flagged that “Barnier tells EU to step back from vaccine war”, whilst the Telegraph ran with “Fury at Macron’s attack on Oxford jab” and the Daily Mail said “EU vaccine war explodes”. The FT also had a front-page headline about the EU’s short-lived threat to impose a hard border with Northern Ireland (“Brussels sparks anger with border plan for Ireland to limit export of vaccines”), but its main story was the huge rally in GameStop on Friday and the continuing battle in the US between amateur share traders and hedge fund shorts: “US watchdog defends Reddit army in battle with hedge funds”.
• Saturday’s Press and News (2): In terms of Retail news, there was loads more coverage of the amazing short squeeze in GameStop in the US, after the massive 68% rally in the shares on Friday sent the market cap of the business soaring back over the $22bn mark…The Guardian had a column by a former Bank of England economist in its Journal section headlined “GameStop is like tulip mania on steroids”.
• Saturday’s Press and News (3): The other big Retail story was the impressive stockmarket debut of Dr Martens on Friday, with the shares surging from the 370p offer price to close at 450p, capitalising the business at around £4.5bn, which prompted much muttering and sucking of teeth in the Business editorial columns…The Evening Standard on Friday thundered that “Dr Martens’ boots aren’t cheap, and nor are the shares in today’s IPO”, noting that “it’s a decent business, but it shouldn’t be valued at a similar multiple of profits as Nike”. The Telegraph highlighted “Booty for all as Dr Martens kicks on”, flagging that, with the company already valued at more than six times annual sales, “it will struggle to justify the hype”. The Times said that “the float is laced with red flags” and that “there must be a risk that Dr Martens’ valuation turns out to be too big for its boots”. The FT
• Saturday’s Press and News (4): As for the news from Boohoo about entering exclusive talks to buy the rump of the Arcadia brands from the administrator, that was picked up by the FT and the Times and the Guardian, with the latter highlighting that “huge job losses loom”. The Guardian also noted that Philip Green’s family is guaranteed a £50m loan repayment from the proceeds of the Arcadia auction but that Top Shop suppliers will probably only get 1% of their money…The Times noted that Card Factory has been given a one month reprieve by its banks and it also flagged that the car dealer Lookers has bounced back with a better than expected trading update for H2 2020. The huge 88% bounce in the Lookers share price after the listing was restored on Friday was the lead story in the Telegraph market report. The Telegraph also flagged that JD Sports has promised to listen to shareholder
• Sunday’s Press and News (1): The headlines on the front pages of the Sunday papers were mostly about the Covid vaccine row in some way: the Observer went with “EU’s vaccine blunder reopens Brexit battle over Irish border” and the Sunday Telegraph ran with “Britain ready to help out EU with vaccines”, whilst the Mail on Sunday trumpeted “Boris’s double vaccine victory over EU”. The Sunday Times went on a different tack, highlighting the loss of income if gambling advertising is banned from sports kit: “Sport faces biggest cash crisis since tobacco ban”.
• Sunday’s Press and News (2): In terms of Retail stories, the highest profile article was the lead story in the Sunday Times Business section about the way in which ASOS and Boohoo are swallowing up the Arcadia and Debenhams brands but ditching their stores, although the headline above “Retail carnage triggers tax crisis” was extremely silly, contrasting the £4.5bn (in huge type-face) annual sales of Asos and Boohoo with the £48m (in tiny type-face) of corporation tax that they paid last year. The real focus of the article was on the debate about Business Rates and an Online sales tax and it had some useful quotes from industry leaders, including one Ralph Halpern…The Sunday Times also had a follow-up article about “Is it time to offer rent-free shops to save the High Street?”, noting how a new packaging-free groceries start-up in Poole has been offered a free shop by the landlord,
• Sunday’s Press and News (3): In other news, the Mail on Sunday had some good stories, flagging that JD Sports (and its US partner Authentic Brands) have held discussions with Asos about operating Top Shop stores under licence and that Harrods has looked at the potential to open a store in Debenhams’ soon-to-be-closed flagship in Oxford Street. The Mail on Sunday also highlighted a City deal to buy the Debenhams pension fund and safeguard the payouts for its 15,000 members. The Observer had a detailed preview of the Amazon Q4 results, flagging that sales are expected to soar over the $100bn mark (“Mighty Amazon is all but unassailable as Covid continues”) and also had a feature on the extraordinary GameStop short squeeze saga (“GameStop traders fire first shots in millennial war on Wall Street”). Finally, the Prufrock gossip column in the Sunday Times contrasted the huge £1bn profit
• Sunday’s Press and News (4): In terms of all the Economics comment columns in the Sunday papers, we would, as usual, highlight the column by the Sunday Times Economics correspondent David Smith (“Can this stuttering recovery now pick up the pace?”), in which he flagged that the lockdown has ruined Q1 GDP (as noted by the IMF) and that the Government has no money left to provide any more fiscal stimulus. We would also flag up the column by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“We must look through vaccine wars to brighter pastures beyond”), in which he noted that the economy should bounce back “like a coiled spring” once all the over 50’s are vaccinated in early spring, but that “with the public finances floating on the candyfloss foundation of zero interest rates and QE, the challenges for Boris Jonson’s Government may be only just beginning”.
oday’s News: There is still no more news on the mooted JD Sports share placing, but the hyper-active management team have been busy spending even more money in the US, announcing today that, notwithstanding their continued interest in the break-up of Arcadia/Top Shop, it has acquired 100% of DTLR Villa LLC, “a hyperlocal athletic footwear and apparel retailer” that currently operates from 247 stores (principally in the north and east of the US) for $495m in cash. The ink is barely dry on JD’s last US acquisition (Shoe Palace), but Peter Cowgill, the boss of JD Sports, says: “This is another exciting milestone in the Group’s development in the United States. Like Shoe Palace, DTLR pride themselves on the deep connection they have with their consumers and the active role they play in the communities that they serve. As such, we intend to retain the DTLR Villa fascia and its proposition”.
This Week’s News: As we move into February, there is little UK retail company news scheduled this week, but Watches of Switzerland issue a Q3 update on Thursday, shortly after the Amazon Q4 results in the US on Wednesday night. First dealings in the Moonpig IPO will start tomorrow morning and unconditional dealings in Dr Martens start on Wednesday (with the 450p share price already trading well above the 370p float price). In terms of the Economic outlook, the MPC meeting interest rate/QE news at mid-day on Thursday will be worth keeping an eye on, given the persistent debate about whether negative interest rates could be justified…