CK Asset Holdings Limited, a Cayman Islands registered but Hong Kong operated property developer, has announced its intention to acquire Greene King via a UK subsidiary. The price paid will be around £2.7 billion, and lucky shareholders will be treated to a 51% premium on the 536 pence per share seen on the day before the announcement. The share price has now surged and that premium is gone.
Weakness in the pound has made UK assets cheaper for foreign buyers in general, but are any of these other companies similar enough to Greene King to tempt a similarly motivated buyer? Furthermore, since pub, restaurant, and brewing company shares have been buoyed by the news, are any worth the price?
Similar Business
Marston’s (LSE: MARS) manages pubs and restaurants and rents them out to tenants and leaseholders as Greene King does. It also brews strong brands of beer, like Greene King does, and has distribution rights for a range of imported beverages. Also, there is a flourishing rooms business, attached mainly to destination and premium locations as an additional revenue source. So we have the property portfolio, and since 14% of the total UK ale market is Marston’s, and about a quarter of the premium ale market falls its way, we have strong brands that are good candidates for export.
In terms of value, Marston’s is a close enough match. Its price per share as a multiple of earnings is a little lower (cheaper) as compared to Greene King before the announcement (I screened out other companies that were more expensive than the average). Its growth of revenue and earnings before interest, taxes, depreciation and amortisation is a little lower, but not significantly (I screened out another company for significantly underperforming on this measure).
Changing the barrels
One concern with Marston’s is that its debt to equity ratio is above average, but the company is in the midst of a programme to reduce this significantly over the next 3-5 years, whilst maintaining the dividend, mainly by reducing capital spending. The latest interim results showed good revenue growth, as did the last annual numbers, demonstrating the existing assets are performing well enough for the plan to work. In fact, a buyer may see an opportunity to rapidly slash the debt, because it does not need to worry about cutting shareholders dividends.
At the current price of around 126 pence per share, Marston’s shareholders are getting a 5.95% dividend yield, and the dividend payment is likely to be maintained. No matter if the company could cover its fixed charges 2.5 times over, the debt load was weighing down the share price, and this is being reduced. Revenue is growing, operating profit is still making incremental improvements, and earnings per share will get a boost as the bite of interest payments shrinks.
With properties located across, and brands entrenched in the UK market, growing revenues, reducing debt and a healthy dividend yield, even if Marston’s shares are not snapped up, they have something to offer.
