The pub trade is hard going these days, with increasing numbers closing every year. And when competition is hard, consolidation is often the answer — and the time to do it may well be when the economy is starting to brighten.
Against that background, brewer and pub operator Greene King (LSE: GNK) confirmed press speculation that it is attempting to line up a merger with Spirit Pub Company (LSE: SPRT). There are no further details at the time of writing other than “a potential combination of the two companies“, but the rules say that we must hear by 21 October whether or not Greene King intends to go ahead with its approach.
£700m offer?
Greene King shares barely responded after an overall lacklustre year that has seen them just about match the FTSE 100′s 2% rise, and they currently change hands at 800p. Spirit, on the other hand, saw its shares spike up by 20% to 90p on the news, for an overall 12-month gain of 20%, after speculation arose of an offer of around £700m following on from an earlier rejected offer.
With Greene King on a market cap of £1.7bn compared to Spirit’s £500m as of Monday’s close, it’s clear which set of shareholders would be in the money.
But would a merger make sense? On the face of it, the two companies look like a pretty good match.
Spirit, formed from the demerger of Punch Taverns in 2011, manages over 750 pubs, many of them in prime locations, and has another 450 or so leased pubs on its books. It also owns a number of attractive brands, including Chef & Brewer, Flaming Grill and Fayre & Square.
Performance synergies
After a couple of years of high costs, Spirit turned in a pre-tax profit of £71m in 2013 and shelled out dividends to the tune of 2.8%. And that looks to be the start of an expected successful run, with decent earnings and dividend growth forecast for the next two years.
For its part, after a shaky drop in earnings in 2010, Greene King has steadily grown its EPS year on year since and has been lifting its dividend accordingly. Its shares are currently on a slightly higher forward P/E than Spirit, of 12.5 against 11, but Greene King is paying higher dividend yields of 3-4%.
Greene King has a total of 1,900 managed, tenanted, leased and franchised pubs, restaurants and hotels, including its Loch Fyne and Hungry Horse chains. It also brews beer (and produces some excellent ales as far as this Fool is concerned), and wholesales beers, wines, spirits and soft drinks.
The timing is right
A combined company would be worth a little over 2.2bn and would sit towards the top end of the FTSE 250, and would be turning over around £2bn in sales with net debt of around £2.2bn — based on their last year-end figures.
The two companies really don’t seem to be too far apart in their fundamentals, and they’re both relatively small fish in the pub business. The timing seems right too, and it gets my tentative thumbs up.