Acquisition of 4,300 pubs – the largest ever pub transaction
Inntrepreneur was a UK tenanted pub portfolio run by individual and corporate tenants. The company’s pub estate was 'tied', meaning that the tenants’ leases required them to purchase beer from the landlord or the landlord’s nominated supplier. In addition to rent from pub tenants, Inntrepreneur’s other source of income was margin on beer and other products bought by its tenants under the 'tie'.
Asset-Backed: Inntrepreneur was made up of approximately 4,300 tenanted pubs across the UK, the vast majority of which were freehold properties.
Requiring Fundamental Change: The estate was performing poorly and was plagued by tenant litigation, primarily concerning the legality of the ‘tie’ agreement. Many tenants were disregarding the tie restrictions in their contracts and were instead buying beer from cheaper alternative suppliers, creating enforcement issues. Although a large number of pubs were actually performing well, their value was being obscured by concern over the litigation.
- A new beer supply arrangement under which lessees were allowed to buy their beer from a large number of different suppliers — rather than from one — and were also offered discounts to the brewers’ wholesale beer prices, which reduced tenants’ incentives to buy beer from third parties. In exchange for the new agreement terms, the tenants would effectively waive their right to litigation.
- Terra Firma created a 'good company/bad company' structure to separate the litigation-free pubs from those involved in legal disputes. The 2,614 ‘good’ pubs were sold to a separate Terra Firma company, the Unique Pub Company, focused on maximising pub value without the distraction of litigation.
- Meanwhile Inntrepreneur’s management team continued to work on the legal disputes, whilst looking for opportunities to realise value by selling its pubs. As the litigation was resolved, Inntrepreneur sold the pub to Unique or found alternative use for the property.
- A new senior management team was installed to manage the pubs that remained in Inntrepreneur and to resolve the remaining litigations issues. A new CEO and management team was also appointed for Unique which could focus solely on improving the operations and strategy of those pubs.
Developing through capital expenditure
Building through mergers and acquisitions
Lowering the cost of capital to create extra upside
- Through creating Unique, Inntrepreneur was able to fully recover its initial investment through transferring pubs that became free of litigation. Unique further improved the quality of its cash flow by converting income from beer margin to rent, through offering discounted beer prices in exchange for rental increases. This ability to demonstrate more reliable cash flows enabled Unique to access securitisation funding at favourable pricing.
Status of Investment: The Inntrepreneur investment has been fully realised. The sale of the pubs unaffected by litigation to another Terra Firma business, the Unique Pub Company, fully recovered the initial investment. As legal issues were resolved on the remaining portfolio, they too were sold, converted to other uses or transferred to Unique, realising substantial upside.