Punch raises £350m to cut debt burden

Simon English
15 Jun 2009

Punch Taverns set about raising £350 million from shareholders today as it seeks to pay down a crippling debt pile of £4.2 billion and convince sceptics that it is through the worst of the crisis in the pub industry.

Britain's biggest pub company — it has 8,000 of them — has been under intense pressure from investors, the Government and some of its own landlords in the last year.

With profits wiped out and dividend payments withheld, some have asked whether Punch's business model is sustainable.

Six British pubs are closing every day, at which rate the last boozer in Britain would call time in 2038.

Today Punch is issuing new shares at a price of between 100p and 125p each. The shares opened today at 148p, valuing the entire company at £396 million.

The shares have dramatically recovered from lows of 32p this year as investors bet that Punch would manage its way through one of the worst downturns the industry has ever seen.
Most of the money raised will be used to pay off a convertible bond due in 2010, ending talk that it would not be able to meet this debt.

Chief executive Giles Thorley said: “There has been a lot of speculation about this bond. We've consistently said we would pay it but it has been a distraction.”

Goldman Sachs and Merrill Lynch will get fees of around £14 million for overseeing the share placing.

The Merrill bankers involved today are Simon Mackenzie-Smith and Rupert Hume-Kendall — the men who took Mike Ashley's Sports Direct to the stockmarket, a float that was good for Ashely and a disaster for pension funds. Thorley also moved to head off a possible inquiry by the Competition Commission into the sector.

About half of Britain's pubs operate under a “tied” system whereby landlords buy a lease from a pubco such as Punch, paying rent and buying beer from the same overlord.

The Business Enterprise Committee recently concluded that a competition investigation was necessary. But Punch tried to confront the concerns of its landlords today by agreeing that there should be an independent process for deciding rent reviews.

Thorley said: “The best people to sort out the industry are in the industry. We are asking for time to do it. It is a sincere effort to get it sorted.”

Trading continues to be tough. Sales at the leased arm are down 11.2% in the 40 weeks to the end of May. At the managed arm, they are down a less punishing 1.2%. Punch shares tumbled 32½p to 116p, dragging the rest of the sector down with them.

Killik & Co said in a note: “The equity of the group is still equivalent to less than 10% of the debt. Although we are happy to recommend stocks which carry high levels of debt, we would caution against those where the outlook for trading remains bleak. We would avoid the shares.”