Betting on British boozers

Private equity has had a great run investing in UK pubs, but can the trend continue? By Philip Borel

It looks as though Robert Tchenguiz isn't done buying pubs. The Iranian-born and London-based property entrepreneur has been stalking Mitchells & Butlers, a listed UK pub operator with one of the largest estates in the country comprising branded chains such as O'Neill's, Harvester and All Bar One. Tchenguiz's interest in the asset has invited speculation that private equity activity in Britain's bars may be about to flare up once again.

Tchenguiz is currently expected to prepare a formal offer for M&B at around 550 pence per share, which would value the business at approximately £4.6 billion ($8.2 million; €6.6million) including debt. Under the rules of the UK Takeover Panel, the tycoon has until May 8 to “put up or shut up,” i.e. either to convert his previous expressions of interest into a formal bid or leave the company alone. At the time of writing, the real estate tycoon was reportedly looking to form a syndicate with HBOS, Barclays Capital and Apax Partners to finance an offer.

If a deal comes to pass— M&B's management has said that a formal approach in writing based on the muted price would need to be taken seriously— and Tchenguiz ends up pulling the pints in the group's 2,000 managed establishments, the question is what he would do to generate the desired return on investment. At 550 pence per share, the billionaire would be paying a hefty 35 percent premium to the company's closing share price on March 13, the day before the market learned of his ambitions. This suggests that in order to make the deal work, Tchenguiz would have to serve up a pretty special brew.

“Investing in pubs has always been about financial engineering.”

If he did, Tchenguiz would in effect add another chapter to the great success story that is private equity's involvement in the UK pub sector. Ever since Guy Hands ushered in a golden age for pub financiers with his first investment in the sector in 1995— demonstrating the dramatic effect that securitization can have if applied to the historically stable cash flows coming out of Britain's beer barrels—numerous private equity firms have done exceptionally well in the segment.

However, some wonder whether the golden age may in fact slowly be drawing to a close. Today, after more than a decade of heavy deal-making, Britain's pubscape is nowhere near as fragmented as it was at the outset. What is more, according to the British Beer & Pubs Association, UK beer consumption has been declining slowly but steadily for years. The recent introduction of new licensing hours has added to the uncertainty over the sector's future, as has a pending smoking ban in England.

None of this has stopped private equity firms from offloading existing holdings in the sector at a profit, thanks in no small part to rapidly rising property prices. Last December, a consortium comprising Blackstone, CVC, Texas Pacific and Merrill Lynch Private Equity sold the Spirit Group to industry leader Punch Taverns for £2.7 billion, a deal that left Punch with nearly 10,000 outlets. Smaller transactions completed in 2005 included PPM Capital's £262 million disposal of the Barracuda Group to Charterhouse, as well as Vision Capital's £219 million exit from Avebury Taverns, which also went to Punch.

But while exits have been plentiful, private equity-backed entries into large estates have been rare, and even industry specialists struggle to remember the last time that a newcomer acquired a large portfolio without already owning another one.

In the context of M&B, the last point is important. Tchenguiz is already one of Britain's leading pub landlords with control of several chains such as Slug & Lettuce, Hog's Head and Yates's. He also owns some 450 tenanted units. If he were to buy M&B, driving synergies through integration with his other holdings would likely be part of his value generation strategy. In addition, Tchenguiz may seek to sell off non-core parts of the M&B estate such as Hollywood Bowl, a bowling and leisure business.

But according to private equity professionals with experience in UK pubs, the key to making money from M&B would lie in adding more leverage. “Investing in pubs has always been about financial engineering, and M&B would be no exception” says one veteran. Given that the company's cash flows have already been securitized, there is a limit to how much more debt Tchenguiz could load onto its balance sheet. The coming weeks will show just how risky a bet he is willing to place.

Oxford colleges launch investment group
Three colleges at Oxford University—Christ Church, St. Catherine's and Balliol—have launched Oxford Investment Management (Oxim) to invest a pool of £100 million (€145 million; $178 million). Oxim has set aside 7.5 percent of the fund to be dedicated to real estate and 7.5 percent for private equity commitments. The co-heads of Oxim are Karl Sternberg, a graduate of Christ Church and former chief investment officer at Deutsche Asset Management, and Paul Berriman, a St. Catherine's graduate and former chief executive officer of Deutsche. According to published reports, around 60 percent of Oxim is owned by the colleges, with the remaining 40 percent owned by its management.

World's most expensive offices: London
According to “Office Space Across the World 2005,” brokerage firm Cushman & Wakefield's annual look at the international office sector, London is the most expensive city for office space. Average office rents in the capital were €1,636 ($2,020) per square meter per year in 2005. Hong Kong took the second-place spot with an average rent of €1,200. Paris, Moscow and Tokyo all had average costs of €1,009. Overall, rents went up 4.3 percent worldwide, up from the 1.2 percent seen in last year's report. Of the 215 locations surveyed, 83 percent had remained stable or seen positive rent growth, while around 17 percent of the markets surveyed saw a decline.

German pension BVV looks to RE
BVV Versich-erungsverein des Bank-gewerbes (BVV), an €18-billion ($22 billion) pension serving the German financial services and banking industry, is looking to raise its allocation to real estate to 8 percent. It currently has a 4 percent allocation to the asset class. According to local press reports, the fund's long-term plans involve increased investments in European property funds and a divestment of the German property it currently owns. BVV is also looking at investing €170 million in private equity funds; it currently does not have an allocation to the asset class. The pension is Germany's largest pension fund and currently invests in government and corporate bonds, as well as equities.

Curzon closes second Eurozone vehicle
Curzon Global Partners, an affiliate of IXIS AEW Europe, has held a final close on Curzon Capital Partners II, a pan-European core-plus vehicle. The fund has raised more than €354 million ($434 million) and will focus on office and logistics properties throughout the Eurozone. The fund held a second close in November of last year and, at that point, was 20 percent committed to new investments in 10 markets across Europe; more than half of the limited partners in the second outing had invested in the previous fund. The firm, which is associated with US-based AEW Capital Management, has more than €13.2 billion in assets under management.