First major purchase of a pub portfolio by a financial buyer
Phoenix Inns was a portfolio of tenanted, untied pubs across the UK acquired from Grand Metropolitan plc and Fosters. Tenanted pubs are managed by individual tenants who pay rent to their landlord, the pub company. Untied pubs or ‘free houses’ are free to source their own beer supply, as opposed to tied pubs, which are bound to buy beer from their landlords.
Asset-Backed: The company owned around 1,800 pubs across the UK, the vast majority of which were freehold properties. Phoenix’s cash flow was predictable and reliable, comprising rental income from the independently operated and managed pubs.
Requiring Fundamental Change: The introduction by the UK Government of the Beer Orders in 1989 led to a number of brewers selling tied pubs and/or freeing pubs from the tie, and focusing on their brewing operations. Terra Firma made the first major entry by a financial buyer into the market. It believed that the common misapprehension that the UK pub sector was in terminal decline had depressed pub prices, and that the value of the portfolio could be enhanced by analysing its value on a pub-by-pub basis and allocating it to its highest value use.
- A detailed portfolio review was conducted to understand how the value of each pub could be maximised, whether as part of other pub portfolios or in alternative use. This analysis identified the optimum strategy for each pub and resulted in the piecemeal and block sale of pubs to regional players and for alternative use.
- The business’s back-office functions were spun-out into a standalone operation to reduce costs and create an efficient service provider capable of winning contracts to provide services to third parties.
- The collection of overdue rents and other receivables were overhauled, with staff incentivised through bonuses to reduce debtor levels.
- The senior management team was strengthened with the CEO and the CFO being seconded from Terra Firma initially and later becoming permanent appointments. This ensured that Terra Firma’s rigorous asset-by-asset approach to maximising value would be applied to the Phoenix portfolio.
Developing through capital expenditure
Building through mergers and acquisitions
Lowering the cost of capital to create extra upside
- The yield on tenanted pubs exceeded the cost of bond finance as the enforced sale of pubs by brewers and the belief that the UK pub sector was declining had depressed pub prices.
Status of Investment: The Phoenix Inns investment has been fully realised, with the pubs sold either individually or in groups to realise the maximum value for each asset. Terra Firma’s returns on exit transformed market perceptions of the pub sector.