UK: S&P Comments on Success Factors of U.K. Pub Companies (+report download)
The U.K. pub industry continues to be an active issuer of public debt, with transactions ranging from secured bonds to whole business securitizations. Furthermore, investor interest has returned with the formation of Mitchells & Butlers PLC out of the pub business formerly owned by Six Continents PLC, and the announcement by Scottish & Newcastle PLC of the sale of its 1,450 pub-and-restaurant estate in April 2003.
"Two credit strengths fuel the growth in debt issuance in the U.K. pub sector," said Anna Overton, a credit analyst at Standard & Poor's Corporate Ratings Europe. "First, the stability of demand and steady cash flow generation inherent in the pub business. Second, the favorable property aspect arising from pub owners' large portfolios of discrete U.K.-based freehold and long-leasehold properties."
The U.K. pub industry offers opportunities for growth in the consumption of high-margin premium products, albeit against the threat of declining beer volumes and retail price pressures. As a result, the performance gap between individual players in this market is set to widen in the medium term.
Pub operators' business strength and the stability of their cash flows are analyzed with reference to six main operational factors, namely:
- The existence of a managed or tenanted business model;
- The revenue mix;
- The use of branded concepts;
- The number and geographical spread of individual pubs;
- Capital expenditure requirements (that is, maintenance and development); and
- Property ownership rights and duration of leases.
Two distinct business models differentiate pub operators in the U.K.--managed pubs, which cover 20% of pubs, and tenanted pubs, which cover 50%. The remaining 30% of U.K. pubs are individually owned. Although estate quality is critical to the success of both types of estates, each model offers different factors for success that determine the quality of earnings for an individual operator. Managed pubs, for example, are run as a fully owned, fully operated business, with the operating company taking responsibility for full profit and loss and capital expenditure. Tenanted pubs, by contrast, provide two principal revenue streams: the rent paid by tenants, who trade for their own account; and the margin on beers and other alcoholic and nonalcoholic drinks sold to tenants.
Companies: Scottish & Newcastle
Fitch Ratings has cut its debt rating on brewer, Scottish & Newcastle (S&N), from BBB to BBB-minus....
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