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Punch boss toughs it out despite continued losses

Pub group reports 5% fall in income over summer

Roger Whiteside, the new chief executive of Punch Taverns following the recent demerger of managed pub operation Spirit, put on a brave face on Thursday as he revealed the debt-burdened tenanted pub business was still losing sales.

Shares in the company had immediately collapsed by 80% following the demerger a month ago, as investors anticipated that the residual business was highly likely to be forced to seek new terms from its bondholders.

Punch revealed a 5% drop in comparable net income for the three months to 20 August, partly due to the absence this year of a World Cup-related boost to trading.

Delivering the year-end trading update, Punch gave no details about acute concerns over its capital structure. “We have the resources we need for the forseeable future,” Whiteside said. “We are in control of our own destiny.”

But doubts persist among investors – both shareholders and bondholders. One analyst said: “It’s not the elephant in the room, it’s the herd of elephants in the room.”

It is thought that Whiteside privately acknowledges the scale of Punch’s debt challenges, but does not want to concede ground publicly ahead of expected discussions with bondholders.

Talks are thought likely to start some time after former British Energy finance director Stephen Billingham takes up his role as chairman in two weeks.

Punch has about £2.36bn of net debt and a market capitalisation of about £63m. The value of the company to shareholders is now little more than twice the £30m bill incurred by the company for demerging Spirit.

Most of the debt is in two long-term securitised loans against the tenanted pub operations. These comprise about 5,000 pub properties – more than 10% of the UK total – rented out to publicans who are tied to exclusive beer-supply contracts.

Under the terms of these loan agreements, Punch’s interest bills are scheduled to start increasing relatively shortly, putting further pressure on the struggling business.

Besides these two securitisation structures, Punch has about £93m of cash and a half-share in drinks distribution business Matthew Clark, estimated to be worth about £30m.

In recent times Punch has had to spend some of its cash reserves in order to ensure its underperforming estate of pubs generates sufficient returns not to breach loan covenants. It remains to be seen how long this can continue.

As set out before the demerger, Punch plans to sell off 2,000 pubs, reducing the business to a core of 3,000 sites. The company believes this will be a more viable business given the current economic climate and sharp declines in pub drinking in recent years.

In the last 12 months it has disposed of almost 400 pubs, roughly realising their value in the group’s accounts. Punch told investors it hoped to sell about 500 pubs a year over the next four years.

Also delivering its year-end trading update was Spirit, newly demerged from Punch under the leadership of former Marks & Spencer finance director Ian Dyson.

Announcing comparable sales up 3.8% for the fourth quarter, it said the business, which includes Chef & Brewer, Fayre & Square and Flaming Grill chains, had seen relatively little impact on trading from recent rioting. Spirit has about 900 mainly food-led pubs in busy locations, largely London and the south of England.

The business, which has historically underperformed its closest peer, Mitchells & Butlers, is still in the midst of a turnaround programme and has carried out 215 major refurbishments in the last 12 months.

Both Punch and Spirit will report detailed full-year results next month. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds