The pub operator is believed to have offered £265m for the pubs, outbidding competitors like Colony Capital, Greene King and Starwood Capital. If signed, the deal could make the difference in M&B’s long-term strategy.
Steven Connell, senior research analyst at industry research firm IBISWorld, told BigHospitality: “The deal would appear to be a sound one for Mitchells and Butlers.The company has underperformed its peers, with like for like sales in the first half of 2013-14 a disappointing 1.1%.
“Buying Orchid fits into the company’s long-term strategy of concentrating on food-focused and family-friendly establishments. The company also sees the importance of owning popular brands in a highly fragmented eating and drinking out sector. Orchid’s Pizza, Kitchen and Bar, Great British Carvery and All Inn’s pubs are popular brands that appeal to a broad range of customers and are registering much faster growth than M&B’s existing brands.M&B have the cash reserves to roll out these brands on a more aggressive scale than Orchid’s owners were prepared to commit to.”
The signing of the deal could lead to further delays in dividends payments for M&B shareholders, after the firm managed to clear its pension deficit earlier this year, creating hope that payments would be resumed after a six-year halt. But for Connell, the longer-term growth potential far outweighs this.“At the price suggested, the acquisition should be earnings accretive,” he added.
Consequences for Orchid venues
As M&B is only rumoured to be interested in Orchid’s food-led pubs, such as Pizza Kitchen Bars, Carvery pubs, and those with a Fuzzy Ed’s Funhouse, the future is uncertain for the firm’s wet-led pubs.
Connell explained: “Less profitable freehouses and independent pubs are of less interest to the company and, if acquired, could be closed or converted into a more profitable format.”
If it goes ahead, this acquisition would be very reflective of general trends in the struggling pub industry, with a wave of consolidations and a food-based revival strategy.
“The pub industry has endured a torrid period, with about 10,000 pubs closing during the last decade due to changing drinking habits, rising rent and food costs and mounting regulation. Both M&B and Orchid have struggled to repay or restructure mammoth debts obtained during pre-crisis pub buying sprees,” said Connell.
Renewed confidence
He pointed out that pub groups across the industry have been selling off less profitable pubs and moving away from the tenanted model to the more profitable managed model, as people tend to drink less but spend more, forcing pubs to change their food and drink offerings to try to capture this.
“M&B’s investment is also reflective of confidence finally returning to the sector, with beer sales showing promise, the economic environment strengthening and pubcos paying down or restructuring debt commitments. Recent cuts to beer duty and a likely surge in activity during the upcoming World Cup are further causes for optimism,” Connell added.
M&B confirmed this morning in a statement that it has entered into exclusive discussions regarding the potential acquisition of the majority of the Orchid estate, but was unable to give more information as negotiations are ongoing.
“Discussions are ongoing and there can be no certainty that a transaction will be concluded. A further announcement will be made in due course as appropriate,” the firm said.