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.
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.
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.
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.
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.