Ei Group (EIG) is set to be taken over by Slug & Lettuce owner Stonegate Pub Company in a deal that values the pub group at an enterprise value of £2.97bn, in an agreement that has pleased some shareholders.
Ei, the largest owner of pubs in the UK with more than 4,000 properties in England and Wales, is split into three businesses - publican partnerships, managed pubs and commercial properties. The group, previously known as Enterprise Inns, is currently in the throes of a growth and debt reduction strategy. It reported the disposal of 348 commercial property assets worth £332.7m "in line with [their] tangible net book value]" in its first half, and has also pursued a share buyback programme.
Shareholders are being offered 285p per share in cash. This represents a 38.5 per cent premium on the stock’s closing price on 17 July, and is 26.8 per cent above Ei's highest closing price over the last decade, which stood at 224.8p on 15 May 2019. Stonegate will acquire all of Ei’s issued share capital for around £1.27bn, with the deal’s implied enterprise value standing at 11.4 times underlying cash profits. Ei chairman Robert Walker said that the deal would secure “an exciting future for our tenants and employees by creating the leading managed and tenanted pub company in the industry”. The group will de-list from the London Stock Exchange.
Those invested in its peer group may look on enviously. House broker Peel Hunt sets Ei's EV to cash profits multiple slightly lower at 10.9, but estimates the group's valuation above those of JD Wetherspoon (JDW) and Marston’s (MAR), which have EV to cash profits multiples of 10.6 and 9.9 respectively, and just shy of Fuller, Smith & Turner (FSTA), which has a multiple of 11.8.
Confidence spread across a sector hit by cost inflation and weak consumer sentiment, as Fuller shares rose 5 per cent on the day of Ei’s takeover announcement, while Wetherspoon shares lifted nearly 3 per cent. Stonegate, which is owned by private equity group TDR capital, has a national portfolio of 765 outlets that includes the Walkabout chain of bars and restaurants. It began trading in November 2010 following its acquisition of 333 pubs from Mitchells & Butlers (MAB), and has conducted at least 12 major transactions, which most recently include its acquisition of Bar Fever’s 32 sites in early 2019 and Be at One’s 33 outlets in 2018.
Ei has been trying to recover from a challenging spell in the 2000s, as a spate of highly-levered transactions threatened its demise. Revisions to ‘beer tie’ rules in 2016 have also presented a hurdle to the business. The reforms meant that tenanted pubs, which previously rented pubs from groups like Ei at a discount in exchange for elevated beer prices, could opt to go “free of tie” and pay for beer and rent at the market rate. At Ei’s half-year results in May 2017, the group said its net income from four tenant pubs that had opted for a ‘Market Rent Only’ agreement had fallen by 18 per cent, as rent income income increases failed to fully offset the drop in beer turnover.
Peel Hunt analysts predicted that Ei’s subsequent turnaround programme would have seen investors waiting until 2022 for the share price to hit 285p. When competitor Punch Taverns was bought by Heineken in August 2017, it was acquired at an EV to cash profits multiple of 9.5, the same as Ei’s closing price the night before the bid was announced. The broker said that 10.5 times EV/EBITDA “would have been the absolute minimum exit multiple” for Ei. Some of the group’s shareholders voiced their support for the deal.
Wes McCoy, senior investment director at Standard Life Investments, which is Ei’s biggest shareholder with around a 10 per cent stake, praised the Ei board for turning the group into a company valued more closely to its asset value. “Pubs, for a while, they were thought as not being good asset value plays because you couldn't trust the asset," he said, commenting that Stonegate's offer was "very much framed around the asset value of the business".
"It's quite a big wake-up call for people looking at UK assets," he added. "In the thick of all of this political maelstrom, we have an entirely UK consumer-centric business being bid for with a large premium."
Another institutional shareholder that did not wish to be named said it was “fully supportive of the proposed transaction and the board’s recommendation”.
