November 4, 2014 / 7:32 AM / 4 years ago

Pub firm Greene King to buy rival Spirit for $1.24 billion

LONDON (Reuters) - Greene King (GNK.L) has agreed to buy smaller rival Spirit Pub Company SPRTC.L for almost 774 million pounds ($1.24 billion), a deal that will boost its network of food-led pubs and hand it a bigger slice of Britain’s lucrative dining market.

The deal creates one of the biggest pub groups in Britain, with over 3,000 pubs, restaurants and hotels.

Like its peers, Greene King has responded to fast growth in the casual dining market by moving away from tenanted and leased pubs where drinks make up a larger proportion of sales. Instead, it has shifted to food-focused outlets which it runs directly, and where profits are higher.

The acquisition of Spirit’s 794 managed pubs, which make up almost 90 percent of the firm’s 800 million pound revenues, will boost that aim, strengthening its offer against rivals such as Marston’s (MARS.L), M&B (MAB.L) and Wetherspoon (JDW.L).

“Spirit is an opportunity to accelerate a stated strategy, (taking) the centre of gravity of Greene King toward retail in broad terms, and food specifically,” Greene King boss Rooney Anand said, adding the industry was “ripe” for consolidation.

The offer values each Spirit share at 115p, comprising 0.1322 new Greene King shares and 8p in cash, based on Greene King’s closing price on Monday - a 52.2 percent premium to Spirit’s Sept. 22 closing share price prior to the offer period.

The offer, including the cash payment, implies an enterprise value multiple of approximately 10.2 times Spirit’s 2014 core earnings. That compares to a sector average of 9.4x for the next 12 months.

Shares in Greene King, which also brews ales such as IPA and Old Speckled Hen, were down 3.9 percent at 777 pence on Monday at 1100 GMT, while Spirit shares were up 0.9 percent at 107.8p.

The proposed deal, which is expected to complete in the first half of 2015, would result in Spirit shareholders owning about 28.9 percent of a combined new Greene King. Around a third of Spirit investors are already Greene King shareholders.


“We see the Spirit acquisition as a sensible move for Greene King,” analysts at Shore Capital said, citing cost savings, geographical fit and the potential to improve pub profits.

Greene King runs an estate of some 1,900 managed, tenanted, leased and franchised pubs, restaurants and hotels and together the firms will have combined revenues of 2.1 billion pounds.

The enlarged group will also have a third of its estate in the more affluent London and south west regions of Britain.

It expects to save at least 30 million pounds per year on lower central and distribution costs, and better deals from suppliers, Greene King said.

With its focus on higher growth pubs, Greene King has been rapidly reducing its tenanted and leased estate but said the addition of Spirit’s 433 leased pubs was a positive due to their quality and high cash generation.

Tenanted pubs traditionally have focused on drink sales and have suffered as Britons drink less or spend less time in pubs, in favour of cheaper supermarket offers.

“We were never calling time on tenanted pubs per se, we were bringing down the overall size of our estate to ensure that our assets were in line with the environment,” Anand said.

Anand declined to comment on the management structure of the enlarged group.

Spirit Pub, which was spun out of Punch Taverns PUB.L in 2011, rejected a takeover approach from Magners cider maker C&C Group (GCC.I) last month but gave the Irish firm a month to submit a formal offer.

Analysts, however, do not expect another bid to materialise with worries arising as to the strategic benefit for C&C.

Editing by Gopakumar Warrier and Clara Ferreira Marques

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