Pub owners Enterprise Inns (LSE: ETI), Spirit Pub Co (LSE: SPRT),Punch Taverns (LSE: PUB), Marston’s (LSE: MARS) and Greene King (LSE: GNK) are all sliding today, after an unexpected House of Commons vote took place last night, which ended the long-standing “beer tie”.
In a surprising move, the removal of the beer tie was an amendment to tacked onto the small business, enterprise and employment bill at the last minute, giving tenanted pub owners no chance to campaign, or prepare for the change.
Enterprise Inns’ management was quick to denounce the surprise move, stating this morning that:
” … This amendment, which was not supported by the Government, threatens to have serious unintended consequences for publicans and the industry at large… “
While according to Punch:
“… The Government’s own research indicated that breaking the tie would be expected to result in between 700 and 1,400 more pubs closing with 3,700 to 7,000 job losses …”
Punch’s management believes that the industry’s outlook has now changed for the worst:
“… We are currently considering the potential impact of the amended Bill on Punch, including the implications for our substantial pub investment programme and our disposal plans… “
Different impacts
The vote in favour of allowing pub tenants to buy beer from any supplier they wish, is likely to have consequences across the tenanted pub sector. And it seems as if the City feels the same way with the shares of Enterprise Inns, Spirit Pub Co, Punch Taverns, Marston’s and Greene King all slumping in early trade.
However, some pub mangers stand to lose more than most. Enterprise and Punch are two of the largest pub managers in the sector. These two companies shave posted some of the largest declines in the sector this morning.
Nevertheless, Spirit has the most to lose from this sudden overnight development. Indeed, the company has just agreed to a £774m, 115p per share takeover offer from peer Greene King, the largest deal of its kind since the credit crunch designed to create UK’s biggest managed pub business.
As Spirit’s shares have now fallen 10% today, far below the offer price, it’s reasonable to assume that the City believes the deal will fall through after last night’s development.
Meanwhile, Marston’s have only fallen 4% this morning, which could be something to do with the group’s pub restaurant model. Marston’s model of tacking restaurants onto its pubs is a style that investors have long shown their support for. Marston’s has traded at a premium to its peers for much of the past few years as investors have struggled to get their hands on the shares.
Bargains to be had
Today’s declines across the pub sector are to be expected, especially considering the uncertainty this development has created. Still, for bargain hunters some opportunities have been created.
For example, Enterprise Inn’s, Spirit, Punch and Greene King all trade at lowly forward P/E’s of 6.4, 13.2, 3.5 and 12 respectively, while Marston’s trades at a forward P/E of 11.9.
However, these low valuations are a warning, there’s now a huge cloud over the sector’s outlook and things could be about to change. This kind of uncertainty is never welcome in a portfolio. Indeed, dependable companies with a clear outlook and a well-covered dividend payout make the best investments.
