Following a spate of high profile investment rounds and acquisition rumours within the UK’s pub sector, a number of questions have been raised. Why has investor interest recently spiked within the industry? Why are a number of high profile deals falling through? And more simply, what do these kinds of transactions entail? Whatever the reasons behind the increased activity, in the opinion of Mark Robson, managing director at Red Mist Leisure, “any time there is a surge in interest from numerous investors into the industry, it is a good thing”.
Having just seen the completion of its own investment deal at the hands of Red Lion Holdings (RLH), a venture comprising industry investors David Ramsey, John Mayers, and the private equity group, Revcap, Red Mist is no stranger to the ins and outs of these types of transactions. Through the Red Mist acquisition, perhaps a little light can be shed behind the curtain of Rooney Anand’s investment vehicle, Tim Martin’s capital raising, and Marstons’ rejected takeover bid.
Robson notes that two years ago, after 15 or 16 years of growth, Red Mist recognised that it was time to “surge forward”. He says that the firm had “taken a lot of time to put the right building blocks in place,” ensuring that all of its systems and processes were in a strong position, if not “too advanced” for the size of the business. In turn, the group realised that it needed to “bring an investor on board” to reach beyond the bank level funding it was receiving at the time.
“We appointed Christie and Co and set about finding an investor, and we had a really solid amount of interest,” Robson says. “I think part of that process taught us quite a lot, actually. At the start of that investment process what we wanted was not as clear in our minds when compared to three-quarters of the way through. I think the whole process, although it is quite intrusive and quite disruptive, was helpful for us to clarify our thoughts and get input from different parties about what they would do and where they saw us going.”
Although an original deal had been on the brink of completion in February 2019, it broke down in the latter stages because of the Covid-19 outbreak. “Thankfully, from our point of view, we were able to reignite,” Robson adds, “and very shortly after we picked up with another party [RLH] who had been interested all the way through, and perhaps were a more appropriate partner for us given the Covid background.”
While Robson suspects many of the front page deals of recent weeks to also have been “bubbling away” under the surface, much like the Red Mist acquisition, he is certain of the influx in opportunities that can be provided during periods of crises.
“They are very tough periods, a lot of people sadly lose their pubs and livelihoods, but they shake up the industry and provide opportunities,” he says. “I think if you are a serious investor that is well funded and has decent experience in the sector, as almost everybody that has come to the fore in the last few weeks has, then you will recognise that if you are going to surge and strike then now is a really good time to do that.”
Whether through targeting an undervalued share price or creating a new fund, “like Rooney has done”. Robson says that there will be ample opportunities in the market to “snap up businesses that are struggling, or [carry out] acquisitions where pubs have failed, and amalgamate those into what will be a very decent collection of pubs”.
While Robson acknowledges that people “will take advantage” of the current situation through suppressed share prices and business casualties, he says that there is a tipping point that we are not “too far away from” regarding when investment within the sector becomes a non-viable option. Despite Boris Johnson’s recent announcement in respect to the road to recovery, Robson argues that it would have been far more helpful for the chancellor’s support to have been provided “hand-in hand” with what the prime minister had to say.
For Robson, the tipping point for investors “hinges” on what the government can provide. “Initially they did really well,” he says. “I think everybody feels a bit forgotten since we were locked down in November and then subsequently in December because the support we have had thereafter is pretty putrid. VAT and business rates [relief] are of no use to anybody if pubs are closed, so all we have really had from the government is a continued furlough scheme, which is appreciated but is costing employers like us an awful amount of money.”
Is it this lack of government transparency and support that is causing higher profile deals, such as Platinum Equity’s Marstons bid, to break down? “It has to contribute towards it,” says Robson. “When you’ve got a backdrop like this, investors have to be very sensible as they are not prepared to push that last 10% to 15% premium on the price.
“I don’t know the details of the transactions but that would be my guess. When you have a climate like this and you are trying to do a really big transaction, you have got to look at the backdrop. We all know that the next year, or possibly even longer, is not going to be straight forward and that is why the government support element is really big.”
Whether these individual deals have faltered due to a difference in opinion over the true value of the involved firms or a lack of faith and clarity in the market may vary from case to case. However, what is certain is that whether finalised deals or purely speculation, the investor interest in the industry will filter positive funding into individual businesses and pubs – providing opportunities to “improve them, make them sustainable, and give them a fresh lease of life”.
Robson adds that the hospitality industry, particularly pubs, is a specifically “entrepreneurial and resilient sector”. He adds that just like was seen in the aftermath of the 2008 crash, the sector will “boom again,” provided it receives the right level of government support. It is at this stage that the industry can return to its “diverse and inclusive sector that helps people in so many different ways”.