UK beer and pub group Greene King embarked on a shopping spree this week and bought 11 pubs from debt-laden rival Punch Taverns in a GBP30.4m (US$49m) deal. Michelle Russell looks at the group's fortunes in a tough UK beer market.

The deal, done at a discount of about 7% below book value, comes barely a week after Greene King issued more than 80m new shares in order to raise an acquisition warchest of around GBP200m.

"These are fantastic assets to have," Nigel Parson, an analyst with Evolution Securities in London told Forbes. "Eight times ebitda, that's a good price. You normally couldn't buy this kind of assets."

The analyst said that the good price comes partly from lower prices during the downturn but also from Punch Taverns' need to sale to pay up its debt.

Punch, like the wider UK on-trade and brewing industry, has been hit by a barrage of woes in the past 18 months, including the smoking ban, the consumer spending crisis, the recession, cheap supermarket beer sales and big rises in duty.

Punch CEO Giles Thorley said: "This transaction is in line with our stated strategy of increasing free cash flow and reducing the overall level of our debt, whilst seeking to maintain investment in our high-quality pub estate."

For Greene King, this is its first sizeable acquisition since the April cash call and covers freehold pubs in London, southeast England and Scotland.

Other acquisitions by the company have included Belhaven in 2005, Hardys and Hansons in 2006 and Loch Fyne Restaurants and New Century Inns in 2007.

Broker Panmure Gordon estimates the Punch deal will boost Greene King's earnings per share by around 1.5%, while KBC Peel Hunt puts the expected 2010 earnings improvement slightly lower at 1%.

Hunt says, "there is no shortage of cheap pubs" and expects Greene King to carry on buying, while it will also continue to buy back discounted bonds "on an opportunistic basis".

The brewer, famous for its Old Speckled Hen and Abbot Ale, has around 2,500 pubs and restaurants and operates breweries in Bury St Edmunds and Dunbar.

Lower property prices and financial difficulties faced by some of Greene King's pub chain rivals, including Punch, have the firm clearly looking to expand its portfolio.

"I am really pleased we have been able to acquire these high quality assets, further strengthening our presence in two key geographies for us. They also match the criteria we set out when announcing our recent rights issue," Greene King CEO Rooney Anand said.

Earlier this year, Greene King reported nine-month sales ahead of the UK market.

The news raised a few eyebrows for a brewer trading in a UK market where on-trade beer sales fell by 6% in the first quarter of 2009. Total beer sales in the UK fell by 8%, their biggest quarterly fall for more than a decade, according to the British Beer & Pub Association.

The figures showed that consumers drank 3.6m fewer pints per day compared to the first three months of last year. 

The trade body used its report to launch a fresh attack on Chancellor Alistair Darling, who in April used his Budget Speech to raise duty tax on all alcoholic drinks by a further 2% above inflation in 2009.

The cash deal, which covers freehold pubs in London, southeast England and Scotland, is expected to be complete by 1 July, said both Greene King and Punch Taverns today (9 June).

Only months ago the BBPA reported that 40 UK pubs were closing down every week, and today (12 June) CGA Strategy confirmed to just-drinks that that figure is likely to now be in the range of 51 to 53 - around 2,750 per year.

A shocking figure. Yet with Greene King clearly hitting on a bargain this week and Punch Taverns finally managing to claw its way out of debt, Nick Hasell for the Times believes the trading outlook is finally looking "a little less bleak", helped by "sunnier weather and the boost to consumers' disposable income from lower mortgage costs".