Last chance saloon for Punch as losses soar

Embattled pub group Punch Taverns sees losses quintuple to over £400m, after a £663m write-down.

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Last Updated: 06 Nov 2012

That figure compares with a loss of ‘only’ £80m last year, so things are getting very rapidly worse for chief exec Giles Thorley and his long-suffering shareholders. That’s despite the fact that the chain – which owns 7,700 pubs, 835 of which it manages directly – is still selling a not too shabby £1.4bn of booze a year, down by a relatively modest 8%. And that the controversial ‘beer tie’ compels all its landlords to buy their ales via Punch, to boot.

A cosy enough set up that ought to make it fairly straightforward to turn a profit, you might think. So what went wrong? The biggest fly in Thorley’s G’n’T is another impairment charge - £663m - on the recession-hit value of Punch’s estate. That’s on top of similar write-downs totalling £600m incurred over the past year and a half.

That scale of write down would be bad for any business, of course, but what makes Punch especially vulnerable to falling asset values is the fact that its debts – a frankly eye-watering £3.8bn – are secured against its estate. That's now valued at £5.4bn, substantially less than a year or two ago. That’s a lot of gearing in anyone’s language, and means that even when it is trading in line with the market these days, Punch struggles to service its borrowing.

Such are the perils of a business model designed back in the good times to squeeze as much value as possible from what is an essentially steady-as-she-goes operation.  Rather like a boy-racer turbo-charging his Ford Fiesta to beat a Ferrari away from the lights, only to be surprised when it blows up half a mile down the road.

But at least Punch has managed to pay off nearly £1bn in debt by suspending dividends and selling under-performing pubs, along with a £375m share issue in July. It expects to raise a further £200m from pub sales next year.  Thorley says he is now ‘shaping the business to deliver a return to long-term sustainable growth and value’ (too late, some might say). But that hasn’t stopped at least one major shareholder – Schroders – from running out of patience, calling for the group to be broken up and its assets sold off piecemeal.

As if all that wasn’t enough to have Thorley crying in his drink, the OFT is also investigating the aforementioned beer tie. Real ale pressure group CAMRA says it restricts availability of beer brewed by small local producers, and wants something done about it. The government has tried to tackle this particular restrictive historical oddity many times over the past 40 years or so, and has usually ended up either doing nothing or inadvertently making things worse.

So Thorley and all the other pub chain bosses will doubtless be hoping that nothing much comes of this particular investigation. If it does, they will all be in need of a stiff drink. Cheers!

 

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