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Could Marston’s bid raise pub sector cheer?

Management plans to evaluate a cash offer from Platinum Equity Advisors
February 1, 2021
  • Pub chain rejects 105p private equity approach
  • Bid follows offers of 88p and 95p in December

Updated 16.30 01.02.21

IC TIP: Hold at 86.3p

Investors in the pub sector – and the shares of UK-focused companies more generally – will be closely watching the unfolding situation at Marston’s (MARS) this week, after the group rejected a 105p-per-share takeover proposal from Platinum Equity Advisors.

The non-binding and unsolicited possible cash offer was first confirmed by the company on Friday. Though no price information was initially given, the news pushed up Marston's shares by as much as 17 per cent to 86.3p on Monday, their highest point since the pandemic-induced stock market crash last spring.

After evaluating the bid over the weekend, the pub group's board unanimously rejected the proposal, and disclosed two earlier offers at 88p and 95p had been made in December.

Like the rest of the pub industry, the group has been hammered by blanket lockdowns across the country, and reported £1.63bn of net debt on its balance sheet at the end of its financial year to 3 October. That compares with just £249m in shareholder equity, suggesting any bidder will require as much dialogue with Marston’s bondholders as its management.

Platinum Equity Advisors, a US private equity firm, was among the initial bidders for AA last year, but eventually dropped out ahead of the roadside recovery firm’s proposed takeover by TowerBrook and Warburg Pincus. Under takeover rules, it now has until 26 February to make a firm offer for Marston's.

A bid for the company, whose extreme leverage is comparable to the highly-geared AA and has required covenant waivers from debt investors, will raise hopes that beaten-up shares of stalwart UK sectors might receive interest from long-term private capital. That could help restore the shine for listed pub groups seen before the Covid-19 pandemic hit, when a spate of deal-making saw Greene King, Punch Taverns and Ei Group all acquired at generous multiples.

Shares in highly leveraged Mitchells & Butler (MAB) lifted as much as 7 per cent on the bid news, although the reaction was more muted for Young & Co (YNGA), Fuller, Smith & Turner (FSTA) and the better-capitalised JD Wetherspoon (JDW), which last month raised £93.7m in a highly-priced equity placing at 1,120p a share.

The long-term investment appeal of Britons’ drinking habits was also underlined last year when Marston’s signed a £780m joint venture deal with Carlsberg shortly after the virus first wave hit. In the event of a change of control, which a successful takeover would trigger, the Danish brewing giant has the right to acquire the 40 per cent of the venture it doesn’t own for between 8.3 and nine times trailing cash profits.

Marston's directors cited the "transformative" brewing tie-up with Carlsberg and a recent deal to operate 156 pubs within the SA Brain estate in South and West Wales as evidence that the private equity offer undervalues the company.

Another complicating element - which Marston's board does not mention - is how much the pub group’s estate is worth, so soon after management wrote off more than £300m in property impairments and goodwill at the end of 2020.

Factoring in another three months of likely cash burn and the potential break-up value of the group, analysts at Numis see fair value in the shares at 96p – or between nine and 10 times cash profits for 2019. Frankly that looks generous, given the levels of debt and the limited prospects for a trade-based rival bid.

It can't feel nice to be on the end of an opportunistic offer that values your company 19 per cent below its market value at the start of 2020. But a lot has happened since then, and a suddenly half-full pint glass could soon appear half-empty. Hold. AN

Last IC View: Sell, 69p, 10 Dec 2020

This piece has been updated to reflect Marston's response to the bid.