Opportunity can be like warm weather, always unpredictable and with no guarantee of how long it will last. Right now, there are a number of Enterprise Inns lessees who must be wondering whether they can make the most of the rays and start to produce hay. Back in 2009, Punch Taverns decided it would chip away at its debts by selling freeholds to anyone who could come up with the right offer.
A large number of high quality Punch lessees – Innbrighton, Beds and Bars, Peach Pub Company, People Pub Company to name but a few – found the cash to buy-in their freeholds. The opportunity was a time-limited one but quite a few smaller multi-site companies stacked up a few freehold bales.
And it feels a bit like history repeating itself right now as Enterprise Inns takes the same route as Punch. It plans to sell as many as 300 of its better quality pubs in the next couple of years to raise as much as £400m to reduce its bank borrowings when it comes to re-finance no later than December 2013.
The starting pistol has already been fired with the sale of 15 pubs in Sussex, Surrey and Hampshire to Fuller’s for £22.9m and a few other sales. Explains Enterprise boss Ted Tuppen: “It’s a bit of asset management – we have the opportunity to generate lot of cash by selling a relatively small number of very attractive pubs.” The opportunity is, of course, one that the company has already taken on a large scale, albeit by the unusual route of selling freeholds on a leaseback basis at the public auctions.
This method of sale allowed the company to retain an operating interest in the pub at least. This time around, it’s much more straight-forward sale of top-end kit – if buyers can meet the Enterprise price targets. Without getting too technical, these revolve around Enterprise being paid 12-14 times its earnings.
So, for example, if Enterprise earns, say, £100,000 in rent and beer income from a particular pub, it’s happy to flog it for between £1.2m and £1.4m. In some cases, this will favour the incumbent lessee, who will have the advantage of being able to marry the value of its lease to Enterprise’s freehold. So at the pub where Enterprise earns £100,000, it might well the case that the licensee could be earning a very similar figure.
The combined earnings of around £200,000 “married” together mean the pub could well be worth a conservative eight times earnings, which equates to £1.6m. The more the lessee is earning above £100,000 in this example, the greater the actual freehold value and the more its worth making Enterprise an offer.