Those pubs companies that have tenanted operations were the clear winners on Thursday as investors breathed a collective sigh of relief following the Office of Fair Trading’s decision to take no further steps with regards to complaints over the beer tie.
Enterprise Inns, Punch Taverns, Marston’s and Greene King were all among the top six performing mid-caps by midday Thursday, with individual gains of between 3% and 18%.
The OFT this morning announced it has not found evidence that the supply ties contribute to higher beer prices nor that they result in reduced beer choice for the consumer. The OFT said it does not believe any further action is warranted and it has decided not to refer the pubco model to the Competition Commission.
All in all, this is a great relief for pub operators, which have seen their share prices suffer in the lead up to today’s announcement amid uncertainty about the industry’s future and fears over the impact to business models if the OFT’s conclusion had not been so positive for the sector.
Altium Securities analysts Greg Feehely and Wayne Brown pointed out this morning that the news will come as a significant relief to Enterprise Inns and Punch Taverns in particular as they have the largest tenanted estates in the UK, followed by Marston’s (around 55% of group earnings before interest and taxation) and Greene King (around 35% of EBIT). Indeed, it is in this order that the pub operators’ stocks traded on Thursday, with Enterprise Inns the strongest outperformer.
Numis Securities’ Douglas Jack and Wyn Ellis commented that given today’s announcement and the level of reconciliation within the industry during the last two weeks, there should be no requirement for any further reviews.
However, the industry still needs to self-regulate and speak with one voice to avoid further Government interference, the analysts said, adding that this is “still the greatest threat of all.”
With relations at the bottom end of the tenanted pub sector still strained, there will be no time for the industry to dwell on today’s result, Numis said. “The true problem relating to these pubs was not the tie, but the fact that the sector is over-supplied with the tail-end pubs, many of which will never again be economic,” the analysts wrote in a note to clients.
Panmure Gordon’s Simon French also had some words of warning. Though this is a positive outcome for those with leased and tenanted earnings, he said, investors should be aware that the Government still has to respond to the Business and Enterprise Committee report from May on pubcos that recommended the matter be referred to the Competition Commission for urgent investigation by a body which has no vested interest in defending its earlier position.
French points out that the BEC subsequently asked the Government to await the outcome of the mediation talks between the industry and lessees and tenants, which were inconclusive, and any OFT review, which we have now had. “Hence any relief may be short-lived,” he concluded.
