Langton Capital – 2020-12-23 – Marston’s, SA Brain, Tasty, holidays, pub closures etc.:
Marston’s, SA Brain, Tasty, holidays, pub closures etc.:
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MARSTON’S TO OPERATE THE SA BRAIN ESTATE OF PUBS: Group will expand without expanding capital & preserve 1,300 jobs.23 Dec 2020:
Marston’s has announced this morning that it is to operate the SA Brain estate of 156 pubs in Wales. It will safeguard 1,300 jobs and our comments thereon are set out below:
• Marston’s PLC has announced that it will operate 141 SA Brain & Co Ltd freehold pubs under the Brains brand. It addition, a further 15 leasehold sites will be operated under management contract
• The group says that, pre-Covid, the units had an outlet EBITDA of some £14m. They will cover their rent 2.5x
• Marston’s says that the units comprise a ‘good quality, well-invested pub estate’.
• The units will be operated on a combination of leased and management contract arrangements – and there could be some movement between the two formats going forward
• Some 1,300 pub employees will transfer to Marston’s and their jobs will be preserved
• Brains, 138yrs old this year, has 86 managed and 55 tenanted pubs, together with a leasehold estate of 15 managed pubs and bars. The pub business currently employs around 1,300 people.
• Covid has hit the group hard. Marston’s announces that ‘Brains’ business has been under significant financial pressure.’
• It says that the deal has the effect of ‘preserving the freehold capital value for its stakeholders, protecting Brains strong, heritage brand name and, importantly, safeguarding the jobs of the pub teams within the business.’
• Marston’s currently has 106 pubs in Wales. It knows Brain’s well and says it ‘has undertaken significant investment in newbuild pubs over the last 10 years.’
• Marston’s adds ‘the Brains’ pub portfolio is entirely complementary with the existing Marston’s estate comprising a mix of well invested, high quality, destination food and wet-led community pubs, as well as pubs with an accommodation offer providing over 200 bedrooms, in prime locations.’
• The units will be operated under the Brains’ brand and continue to offer Brains’ beers in these pubs.
The financial impact:
• Some 141 of the freehold pubs (the freehold retained by Brains) will be operated on a leasehold basis, with effect from February 2021, with rent chargeable from April 2021.
• Marston’s says ‘the majority of these will be on long lease agreements of 25 years.’
• The outlet level EBITDA on a pre-COVID basis is £14 million and annual rent of £5.5 million will be charged from April 2021.
• The group says it will operate the 15 short-leasehold sites on a management contract basis for a period of two years.
• Marston’s estimates there will be an initial incremental central overhead of up to £2 million required to operate the additional pubs.
• The deal, therefore, will ‘be earnings accretive in the first year post completion.’
• Marston’s says it ‘sees opportunities to further grow earnings in the medium term through conversion to franchise and additional investment opportunities in the estate. The transaction does not impact Marston’s financial strategy to reduce borrowings to below £1bn by financial year 2024.’
• The deal should complete in February 2021 and a more detailed presentation of the transaction will be set out on the completion date.
• CEO Ralph Findlay says ‘we have worked closely with the management team and the SA Brain family to collaborate on a mutually beneficial transaction that safeguards the future of Wales’ leading pub company, enabling these great pubs to have a stable and successful future, and securing 1,300 hospitality jobs in Wales.’
• Mr Findlay says the ‘transaction is entirely consistent with Marston’s long-term strategy as a focused pub operator and strengthens our representation in South and West Wales, whilst protecting the heritage and independence of an iconic Welsh business.’
• He adds ‘these high quality pubs are a great fit with our existing estate and will benefit from Marston’s scale and operational expertise to further unlock their excellent long-term potential. We look forward to the pub teams joining us and to welcoming guests and the communities which they serve, back into these pubs as the country emerges from the pandemic over the weeks and months ahead.’
• Chairman of SA Brain John Rhys says ‘this agreement marks the formation of a lasting strategic relationship with Marston’s which secures the future of Brains’ pubs and 1,300 of our employees within them.’
• He adds ‘we know and trust Marston’s to be excellent custodians of our pubs and, whilst this is not a decision we have taken lightly, we are confident that both our pubs – and our pubs teams – will thrive under their stewardship.’
• Brain will retain its brewery.
• Marston’s has enacted two innovative deals during the Covid-19 pandemic.
• This represents a ‘capital-light’ extension and could set a precedent.
• Pub trading, at the moment, is either very reduced or non-existent but both this deal and the Carlsberg JV are testament to the group’s determination to look to the longer term.
• At its final results, Marston’s reported that, whilst trading remains uncertain across the industry as a whole, it can operate at 90% of last year’s levels under Covid restrictions and outperform the market as a whole – when allowed to do so.
• Into the New Year, the emergence of several effective vaccines gives real grounds for optimism that next year will be better than this one has been.
• Marston’s can break even at much reduced levels of turnover and, post the Carlsberg and SA Brain’s transactions, it will be a focused and now enlarged pub retailer.
• Forecasting is not yet possible but, looking longer term, pandemics are rare, hostelries have been around since biblical times, Marston’s debt is reduced, and it has a well-financed, largely-freehold estate.
• Though much uncertainty remains, it is clear that supply across the hospitality industry will be reduced going forward and Marston’s is well-positioned to prosper over the medium term.
PUBS & RESTAURANTS:
Vaccine, testing etc.:
• As much of the country faces Christmas in Tiers Two, Three or Four, the Guardian reports that ‘the government has shelved plans to open rapid-turnaround coronavirus test centres across England over Christmas amid concerns from public health experts about the accuracy of their results.’
• PM Boris Johnson is facing criticism for allegedly overpromising and underdelivering. Operation Moonshot is reportedly under some pressure. It is the government’s £100bn mass-testing plan, which aims to increase the number of tests carried out each day from 430,000 to 10m by early next year.
• The absence of rapid testing may also make opening up the Channel Tunnel that bit more problematic.
Other Covid issues:
• CGA’s Market Recovery Monitor has reported that more than 59,000 sites in England are currently closed, except for takeaway, under the government’s Covid restrictions. The figure is up from 37,000 sites shut as a result of restrictions last week. CGA says ‘these figures show the catastrophic and still growing impacts of restrictions on hospitality’s ability to trade.’
• CGA adds ‘tipping London and many other areas of England into tier three is a hammer blow for operators, consumers and businesses right along the supply chain. Trading in tier two is little easier, and for pubs and bars that depend on drinks sales, the limits effectively spell lockdown.’
• Re Tier Four, CGA says ‘the UK government announced an additional fourth tier to the current three-tier restrictions. Under the strictest fourth tier, a stay at home message will be put into law and people should not leave the region except for essential travel, including work and education. As with tier three, hospitality venues must close, with the exception of providing food and drink for takeaway.’
• Transport links between the UK and France have begun again as the French government agreed to ease its travel ban. Not all travellers will be free to travel. French citizens, British nationals living in France and hauliers are among those now able to travel – if they have a recent negative test. Some thousands of freight lorries are backed up in Kent. Tests will need to be rapidly organised in order to allow those permitted to move to travel.
• Tesco has introduced limited purchasing limits on some items including eggs, rice, soap and toilet roll.
• Although moves are underway to get freight moving again, supermarkets are warning that there could be shortages of lettuce, broccoli, citrus fruit and other fresh food over the coming days.
• Sainsbury says ‘if nothing changes, we will start to see gaps over the coming days on lettuce, some salad leaves, cauliflowers, broccoli and citrus fruit – all of which are imported from the continent at this time of year.’
• Insolvency specialist Begbies Traynor warns that 39,232 retailers in the UK are in ‘significant financial distress,’ this being the case even before the introduction of tighter restrictions over the weekend in London and rumours that the whole of the country could go straight into lockdown after Christmas.
• Begbies Traynor found that the retailers were experiencing severe financial problems in the three months to 9 December, up 11% on the number suffering in the previous three months and 24% up on a year ago.
• Begbies says ‘without doubt this has been one of the toughest years ever experienced in the retail sector.’ It adds ‘while many industries have been hit hard, retail, which was already suffering a crisis of confidence, has been shaken to its foundations. High-profile administrations such as Arcadia Group and Debenhams not only threaten thousands of jobs, they also raise questions over the future of the high street as we know it, and I expect there to be more as we enter the new year.’
• Deliveroo, which is thought to be preparing to IPO, is reported to have made £320m in losses in the year to end-2019 before being boosted in the current year by the impact of the Covid-19 pandemic.
• Losses at Deliveroo were up by 40% last year with sales up by 62% at £772m. The company says it invested heavily last year. The Telegraph reports ‘the company attributed the larger losses to increased investment, after it spent heavily on expanding into new regions. Operating costs were thought to be particularly high in Germany, where Deliveroo struggled to make headway in a highly competitive market, resulting in it pulling out the country.’
• Deliveroo is now reported to have been profitable over the last six months. The CMA allowed an investment from Amazon to progress earlier this year. The upcoming IPO could value the company at around £3bn.
• Founder Will Shu told a Web Summit conference ‘we’ve demonstrated our model is profitable. We’ve been profitable at the operating level for over six months now.’ He said the UK business had doubled in size over the last year.
• Tasty has announced that ‘Sam Kaye, joint Chief Executive Officer, has become a non-executive director of the Company and Jonny Plant, joint Chief Executive Officer has become sole Chief Executive Officer with immediate effect. This will allow Sam Kaye to devote more time to his other interests in these challenging times.’
• Chairman Keith Lassman says ‘Sam has committed himself to the Company for almost two decades and the Board looks forward to continuing to benefit from Sam’s input and experience in his new role.’
• The National Residential Landlords Association has commissioned research suggesting that over 800,000 private tenants in England and Wales could be in arrears on their rent. It found that young people and the self-employed (who are most likely to have either lost their jobs or a part of their income as a result of the pandemic) were also the most likely to have missed payments.
HOTELS & LEISURE TRAVEL:
• Jet2holidays has suspended flights and holidays to the Canary Islands and Turkey. The company says ‘due to the latest travel restrictions imposed by the Spanish, Turkish and Portuguese governments, we have taken the decision to suspend flights and holidays to the Canary Islands and Turkey, as well as extend the suspension of flights and holidays to Madeira.’
• The CAA has confirmed that credit notes issued after holidays were cancelled will be covered by the Air Travel Trust fund. This covers ATOL bookings.
• Deloitte has suggested that the travel industry should not view the availability of Covid-19 vaccines as some sort of ‘magic bullet’. It says ‘polls show an all-time low in consumer confidence. A VisitBritain poll showed three quarters of consumers were not expecting to travel in the near future.’
• Center Parcs is to close its UK villages over Christmas until 7 January at least.
• Carnival UK chairman David Dingle has told Travel Weekly that cruises from the UK could re-commence in the spring. He says ‘remember, it takes between eight and 12 weeks to get a ship recommissioned and ready to start, to bring crews back, get crews trained in the new protocols.’
• Some 50 countries have now banned arrivals from the UK.
• Virgin Atlantic, British Airways and Delta Airlines will require travellers to take COVID tests before they fly from the UK to New York.
• Motorway services operator Applegreen is to be sold to private equity interests in a €718.1m deal.
FINANCE & MARKETS:
• The ONS has reported that government borrowing remained elevated last month. The government borrowed more in November 2020, some £31.6n, than it had ever done in that month before. The OBR says that borrowing could hit £372bn for the financial year to March as a whole.
• The Halifax suggests that house prices could fall by 2% to 5% next year as unemployment impacts demand and the Stamp Duty holiday ends.
• Sterling a little higher at $1.3406 and €1.0998. Oil lower at $49.34. UK 10yr gilt yield down 1bp at 0.19%. Markets broadly better yesterday but London set to open down around 15pts.
RETAIL WITH NICK BUBB:
• Today’s News: There has been no further news on the break-up of the bankrupt Arcadia empire and nobody else (so far) has followed Frasers in moaning about the impact of the shock closure of non-essential shops in London and the South-East just before Christmas and the Boxing Day Sales. But the home shopping business N Brown has confirmed that its share listing is moving down to AIM at 8am today, following the rescue £100m placing, backed by the Alliance family. And, despite the Tier 4 lockdown of London, British Land has announced the sale of a 75% interest in a portfolio of three office buildings in the West End to Allianz Real Estate, for a useful £401m (a blended net initial yield of 4.32%, a premium to September book value). And yesterday Waitrose announced that someone called Charlotte di Cello is to be the new Director of Trading: she joins next month from the struggling
TRADING STATEMENTS & EVENTS:
Upcoming results are set out below:
• 15 Dec 20 Shaftesbury FY numbers
• 16 Dec 20 Wagamama (Restaurant Group) bondholder update
• 17 Dec 20 Revolution FY numbers
• 17 Dec 20 JD Wetherspoon AGM
• 17 Dec 20 SSP FY numbers
• 18 Dec 20 Fulham Shore H1 numbers
• 22 Dec 20 Revolution AGM
• 5 Jan 21 Morrison’s Xmas update
• 6 Jan 21 Gregg’s Q4 update
• 7 Jan 21 Constellation Brands Q3
• 12 Jan 21 Nichols FY trading update
• 12 Jan 21 Games Workshop H1 numbers
• 14 Jan 21 C&C EGM
• 15 Jan 21 Gym Group trading update
• 19 Jan 21 Premier Foods Q3 update
• 20 Jan 21 JD Wetherspoon H1 update
• 5 Feb 21 On the Beach AGM & trading update
• 11 Feb 21 Pepsi FY numbers
• 3 Mar 21 Government Budget Statement
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