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After lengthy negotiations with the tax authorities, Enterprise Inns announced on 7 May 2008 that it had finally received the go-ahead to convert to a Reit, triggering a 20 per cent rise in its share price. Rival Punch Taverns took the opportunity to remind the market that it, too, continues to consider a similar move "on its own merits". It's shares closed up 11 per cent, while Greene King's and Marston's gained 10.7 per cent and 16.4 per cent respectively.
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Enterprise said that the tax authorities have agreed to consider wet-led sales as a rental income provided an internal restructuring is undertaken. Enterprise - owner of 7,700 pubs across the UK - said that it will now consider whether or not to recommend such a structure to its shareholders, flagging that the work will take several months to complete.
Such a move could herald a radical change for the sector. Under a Reit structure, companies are exempt from corporate taxes provided 90 per cent of the relevant income is redistributed to shareholders via dividends.
In a reaction note, broker Evolution Securities said that conversion to such property structures "will trigger a transformation of the pub sector over the next few years that will be second only in magnitude to the 1989 Beer Orders. More managed pubs will be switched to tenancy, the remaining managed pub estates will consolidate and the majority of equity in the sector will be treated as real estate and income shares rather than cyclical leisure".
Under the brokers' calculations, assuming a 95 per cent payout, Enterprise Inns dividend could more than double - jumping from the 20.5p to 41.6p. On the same basis, the broker also estimates that the dividend of Punch Taverns could increase more than five-fold, to 97.1p (from 17.8p).
While the overall reaction in the City was largely positive, Blue Oar analyst Mark Brumby, nonetheless, warned that a conversion to a Reit was far from a "slam dunk", and cautioned that the 29 per cent move in the share price was probably overdone.
A conversion to a Reit is certainly attractive for shareholders of pub companies. Yet, last year, investors burnt their fingers on rumours of such property deals. As nothing is yet certain, this new wave of enthusiasm should be treated with caution. In the short term, it is, nonetheless, likely to put a floor under the pub companies' share prices. As such, Enterprise Inns is not an outright sell anymore. Fairly priced at 481p.
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
