Citing the need to conserve cash, Punch chief exec Giles Thorley today announced that the final dividend – worth 10.2p a share last year - would be suspended this year. The announcement sent shares in the UK’s largest pub chain 13% lower.
Although sales from the firm’s 8,500 pubs have weakened over the summer, down around 3.4% on last year as consumer spending slows, the group remains on target to meet pre-tax profit forecasts of around £262m. So if it’s trading OK, why cancel the divvy? The answer is simple: debt. Punch operates what the Americans call a ‘highly-leveraged’ business model. In other words it’s hocked up to its optics, owing getting on for £5bn in total. That’s on a business whose assets are worth ‘only’ around £1bn, the majority of the debt being secured against income as the pub trade traditionally generates a lot of cash.
Now here’s the rub – Punch has a £295m convertible bond (i.e. a chunk of debt) which falls due for repayment in December 2010. In the normal scheme of things the firm would raise the necessary to make the repayment on the capital markets. Only these days the capital markets are a lot less keen to get involved in this sort of deal than they used to be, so Punch is faced with the unappealing prospect of potentially having to dip into its own funds – the horror! Hence Thorley’s urgent desire to save cash – 2010 is still away off, but then £295m is quite a chunk of change. Perhaps they should start passing a pint pot round the bar so customers can show their appreciation.
If economic conditions don’t improve in the coming months – and even the most upbeat of glass-half-full types now concede that this is unlikely – the prospects of Punch’s divvy returning before the repayment deadline look shaky. It will save a modest £27m by dropping the final dividend this year, but would bank a rather more substantial £100m if it were to can it entirely between now and 2010. That’s no small beer.
In today's bulletin:
Punch pulls final dividend
OECD takes wind out of Gordon's sails
Small business banking like pulling teeth
Brand that's Virgin on the tarnished?
Entrepreneur Weekly: My Week, by James Caan