Spirit Pub/Greene King merger still on despite UK MPs’ anti pub tie vote
Greene King [LON:GNK] is going ahead with its plan to merge with Spirit Pubs [LON:SPRT] despite the House of Commons vote to allow pub tenants to exit rental ties to parent companies, a Greene King spokesperson and a source close to the situation said.
The House of Commons yesterday (Tuesday) passed an amendment to a bill that could mean pub owners will no longer be able to determine which beer their tenants purchase.
The vote sent pub stocks tumbling Wednesday morning. Greene King was down 4.45%, Spirit Pubs dropped 7.18%, Punch Taverns [LON:PUB] fell 10.89% and Enterprise Inns [LON:ETI] dropped 15.27%. The bill now enters a report stage before a Third Reading in the House of Commons and passage through the House of Lords, according to the UK parliamentary website.
A top 20 Greene King shareholder noted analyst reaction that the law change would have a much greater effect on tenanted pub companies like Enterprise and Punch Taverns than on Greene King and Spirit.
Announcing the deal, Greene King said that of its 1,900 pubs, just under 900 represent its leased business. Spirit has 433 leased pubs in its estate of 1,227.
Brewer and pub operator Greene King uses its pub network to promote its own beer brands through “pub tie” agreements with tenants. Pub companies in the UK have run ties for hundreds of years, allowing them to feed their own beer or preferred suppliers’ beers into a large proportion of the UK’s pub outlets.
In written evidence to Parliament on the Small Business, Enterprise and Employment Bill published on the parliamentary website on 15 October, Greene King said “any proposals which would add a free-of-tie option to the legislation should be avoided, as this would at the very least lead to significant pub closures and job losses.”
The brewer and pub owner said it has run its business “very successfully for over 200 years based on the tied pub model.” Over 75% of its tenanted and leased estate of 860 pubs is operated under a traditional short-term tenancy agreement, Greene King said.
“We were concerned about calls during Second Reading for the legislation to go further and include a mandatory free-of-tie option for tenants,” Greene King wrote. “This would have a hugely negative impact on Greene King. We have operated pubs under the Beer Tie for over 210 years and strongly believe the model is not broken and that it will continue to evolve over time as an integral part of our diversified business,” it said.
“Should the existence of an enhanced code be deemed necessary, it should address the more damaging leases – the long-term fully repairing and insuring leases, rather than the traditional short-term tied tenancy agreements which make up the vast majority of our estate, and are the tenancies operated by the family brewers. Whereas the short-term tenancy offers a low cost entry and ease of exit for tenants, the longer-term leases require a higher level of investment from the tenants, who also receive less support and are tied into longer contracts,” Greene King said.
Barclays analysts wrote they would expect pub companies to challenge the new clause on legal grounds. However, assuming it does receive royal assent, they noted it is difficult to anticipate the number of tenants that would opt for a free-of-tie arrangement.
"Some of them will no doubt be happy with the relationship where low rent is effectively subsidised by 'high' beer prices," the Barclays analysts wrote.