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Pub companies hit by new law

MPs have voted to add a Market Rent Option (MRO) to the Small Business, Enterprise and Employment bill, placing Britain's pub companies' profitability in jeopardy.
November 19, 2014

Some of Britain's largest pub companies were dealt a blow this week after MPs gave the government a bloody nose and voted to add a Market Rent Option (MRO) to the Small Business, Enterprise and Employment bill. The new legislation is on its way to the House of Lords.

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Companies such as Enterprise Inns (ETI) saw their share price crash 14 per cent on Wednesday morning, with shares in debt-laden Punch Taverns (PUB) falling 10 per cent and recent acquisition-target Spirit Pub Co (SPRT) down 6.5 per cent.

The MRO would remove the 'beer tie' which pub companies currently benefit from, which goes some way to explain investors' reaction to the news. At present, tenants purchase supplies exclusively from the parent company which owns the pub, but the removal of such a 'tie' would mean pub landlords could purchase goods from wherever they choose, driving up competition in the market and removing the monopoly held by listed pub companies.

The parliamentary decision came just one day after Enterprise Inns reported 2014 annual results. Like-for-like net income rose 1.4 per cent last year, with 0.5 per cent of growth in the final quarter. Enterprise's rampant disposal programme, which is culling under-performing sites from its estate, meant underlying cash profits dropped to £302m (2013: £313m), although pre-tax profits (excluding exceptional one-off charges) stayed flat at £121m.

Analysts at Numis believe the new bill will be subject to more scrutiny in the House of Lords and may face other independent legal challenges as well. At the moment, companies like Enterprise Inns derive a substantial amount of their income through tied beer purchasing, also known as 'wet rent'. This means tenants have to sell the beer made by the parent company on site - but this would not apply under the new rules. Numis adds that the new laws and an elimination of the beer tie would inevitably hurt pub companies' profitability.