Scrutineer: Rolling with the punches

Published on Monday 15 June 2009 21:42

Punch 104.00p -44.5p

ALL pub groups have been taking a caning in the past couple of years – the smoking ban, rising beer duty, supermarkets virtually selling booze as a loss-leader, and consumers reining in as the downturn bites have all clobbered the entire sector to varying degrees.

But Punch Taverns, Britain's biggest pubs operator, has had the misfortune to enter this period with the biggest debt in the sector, well over 4 billion. Servicing that debt as profits have taken a dive and pub property values have plummeted has squeezed Punch badly.

The share price up until yesterday had suffered as a result, losing 55 per cent of its value in the past year as investors surveyed the bleak scene.

Against this backdrop, Punch's decision to tap shareholders for 350 million via an institutional placing and open offer yesterday was always going to go down badly.

Sure enough, the news was greeted with a further 30 per cent being slashed from Punch's share price. After all, the amount being raised is not far off the company's total stock market value at start of play yesterday, 396m.

But although the capital-raising is an unwelcome jolt in the short-term, it is still probably the best strategy for the medium term.

A fair slug of the money raised will be used by Punch to buy back 275m in outstanding convertible bonds. The likelihood of tough trading conditions continuing meant there was doubt whether Punch would still be able to redeem those bonds when they mature in December 2010.

This was overhanging the share price, so at least biting that bullet now takes the convertibles issue off the table and allows management to focus on running the business through a heavy downturn.

Shareholders are being asked to take the pain now in order to provide greater financial stability, and hopefully a positive share price reaction, farther out.

Punch has also made progress at paying down its debt, which is the real elephant in the room – even above the convertible bonds issue.

The company had paid off more than 400m – 8 per cent of the total – since the beginning of its financial year last August. To do so, the group has frozen dividend payments, slashed costs and mothballed its trademark growth-by-acquisition strategy.

The latest capital-raising also has the advantage of limiting the number of cash-raising pub sales Punch has to make at unattractive prices in these buyers' markets.

Last week the company sold 11 pubs to rival Greene King for 30.4m, including the Burnbrae in Bearsden, the Cuddie Brae in Musselburgh and The Maltman in Glasgow. That was not a top-dollar price – but it's doubtful there ever would have been one in these trading conditions.

Regarding trading, Punch had limited good news yesterday. It said underlying earnings at its 8,000-strong estate had at least not worsened since the interim stage when profits slumped 38 per cent.

Those earnings are down a similar 11.2 per cent over the longer 40-week trading period. Sales in the managed pubs are up 1 per cent, a glimmer in the gloom.

Chief executive Giles Thorley says in this context Punch remains "very cautious" over the group's prospects in the short-term.

Yesterday was not a good day for Punch's shareholders and it is doubtful whether private investors in particular will be knocking the doors down to participate in the 50 per cent clawback element of the group's fund-raising. But Punch's latest move, and its recent safety-first strategy, suggests the group is doing most of the right things against headwinds.

STILL in the drinks sector, the fizz has gone out of the champagne market.

Majestic Wine, which has an 11 per cent share of the champagne market in the UK, says sales of bubbly have been hit by the recession.

Interestingly, corporate Britain in particular does not feel in the party mood – while overall sales of champagne by Majestic were down 7 per cent in its latest trading year, sales to business customers suffered more, down 7.5 per cent.

It contributed to a 22 per cent fall in full-year profits at the company to 12.7m.

Majestic's chief executive, Steve Lewis, said it was clear that big business had cut back on champagne both for entertaining and as gifts.

This is predictable – any finance director worth their salt will find it difficult to sign off champagne in the current climate. It is a drink that feels viscerally out of sync with the mood of the times.

Majestic will have to look more to common-or-garden wine – where it has a 3 per cent market share – to drive any profits recovery.