Dublin's C&C takes minority investment in Admiral Taverns

Dublin-based drinks maker C&C Group plc is joining forces with privately held Proprium Capital Partners and the management of pub operator Admiral Taverns in a management buyout. Admiral Taverns is the owner of 845 pubs mainly in England and Wales.

It is currently owned by private equity firm Cerberus Capital Management, which is selling its entire stake. In Greek mythology, Cerberus is the name of the monstrous multi-headed dog that guards the gates of Hell to keep the dead well and truly in.

Cerberus announced its purchase on 3 January 2013. It said at the time that the investment supported continuity in management and strategy for Admiral which at that time had 1,100 pubs. Cerberus bought it from Lloyds Banking Group.

Deal details

C&C is investing £37m to acquire 47% of Admiral's issued capital. It will fund the investment from existing C&C facilities. Admiral will be accounted for as an associate of C&C. The remaining equity is provided by Proprium Capital Partners and Admiral management.

In technical terms, the debt funding for the acquisition is non-recourse to C&C. In simple English, this means that the debt is being undertaken by Admiral itself. It will not therefore appear on the C&C balance sheet.

Investment highlights

C&C says it believes the investment will deliver significant benefits to its British businesses through

• Collaboration with an experienced and skilled management team
• ·Participation in an earnings stream from a tenanted pub estate
• Direct access to 845 pubs through a procurement and supply agreement
• Mid-single digit earnings accretion and attractive returns on equity in the first full financial year following completion
• A long-term commitment from its partners to develop the business

The Admiral business

Admiral's pubs are 95% freehold or long leasehold. They sit in predominantly suburban or city locations and are operated as a tenanted estate. The management team at Admiral will continue to lead the business.

Stephen Glancey, C&C CEO, said: “The local pub remains at the heart of many suburban and city communities – often the hub of local activity and their economic and social contribution is immeasurable.

He adds that C&C has a long and successful track-record of supplying and providing financial support to local pubs within the independent free-trade in Scotland and Ireland.

The pub still a key

“In the UK, the tenanted pub model is a key component of the pub industry,” he says. “When well invested, and with the right operator and product range, it can provide excellent sustainable returns to all participants.

“Admiral management has a proven track record in balancing these returns with the needs of their tenants and consumers. Today’s new arrangements will enhance choice for both tenants and consumers and provide a platform for further growth at Admiral.

Glancey says that for C&C, this is an attractive opportunity to create a new long-term investment in the important on-trade channel, without taking significant financial and operational risk.

C&C brand list

C&C Group plc owns, manufactures, markets and distributes branded beer, cider, wine, soft drinks and bottled water. Its list of brands includes Bulmers, the Irish cider brand, Tennent’s, the leading Scottish beer brand, and Magners, the premium international cider brand.

It also owns a range of niche and super premium ciders and beers, such as Menabrea, Heverlee, Chaplin & Corks and the recently acquired craft cider - Orchard Pig.

C&C Group also owns and manufactures Woodchuck, a leading craft cider brand in the United States and manufactures and distributes a number of third-party international beer brands in Scotland and Ireland.

Listed in Dublin and London

C&C is also a leading drinks wholesaler in Scotland and Ireland, where it operates under the Tennent's and C&C Gleeson brands respectively. It is listed on both the Irish and London Stock Exchanges. The Dublin share price rose 1.25% on news of the Admiral investment.

On 17 May this year C&C reported its results for the year ended 28 February. These showed net revenue down to €559.5m from the €662.6m reported in 2016. Operating profit fell to €95m from €103.2m. Free cashflow was €58.3m against €126.4m a year earlier.

Proprium says its investment philosophy is to partner with leading local, real estate related companies seeking to create long-term, sustainable growth. It has offices in the New York area, London, Mumbai, Hong Kong, Sydney and Atlanta.

C&C advisers include

• Financial adviser to C&C: HSBC (Keith Welch)
• Joint corporate brokers: Investec (Chris Treneman); Davy (Ronan Veale)
• Investors, analysts and media : FTI Consulting (Mark Kenny/Jonathan Neilan); Novella (Tim Robertson)

Long-term context

This is the latest in a long line of mergers and acquisitions struck in the UK pub industry since the late 1980s when the the government led by Margaret Thatcher began trying to increase competition (known usually as the 'Beer Orders'), creating the PubCo model.

In 1989 government forced the divestment of the major brewers’ pub estates. Financiers seized the opportunity presented by the change in competition policy. In less than a decade the pub industry was the subject of ‘financialization’.

Control transferred to independent firms, the ‘PubCos’. These were backed, and in some cases operated, by financial services intermediaries.

A rounding error

In the context of the sums of money spent over the past nearly four decades the price is barely a rounding error. But it remains interesting for a number of reasons that go beyond the merely financial.

It demonstrates that some people think there is still profit to be made in an industry that many observers believe is inevitably doomed to extinction by a combination of legal and socio-economic factors.

These include

• The smoking ban which came into force on 1 July 2017
• Rising prices in pubs
• Squeeze on incomes
• The growing acceptability of at home drinking of cheaper supermarket products
• The inability of most British pubs to serve palatable wine at the appropriate temperature
• The questionable quality of most British pub food

Questions on the table

There are specific questions that this writer wants answered. Is this a truly commercial deal in terms of the ongoing viability of the underlying business?

Or, given Proprium's specialism, is it a property-driven transaction? If this latter, how will that impact upon the future of Admiral Taverns? Will its structure remain as it is? Or will it follow the once-popular operating company/property company (opco/propco) model?

And finally, why is Cerberus selling? Messages have been sent to or left with all the principal parties known to be involved. We will update accordingly as and when (or should we say if?) they respond.

Comment from Cerberus

When Cerberus replied, it noted that it and Admiral Taverns management expanded the business meaningfully through increased investment in strategic initiatives. This included the successful acquisition and integration of a portfolio of 111 pubs from Heineken UK.

Cerberus says it partnered with the management team at Admiral Taverns, led by CEO Kevin Georgel, to strengthen and expand the business for the benefit of investors and Admiral's stakeholders, including consumers, tenants, and communities.

Said Ronald Rawald, head of international real estate and senior managing director of Cerberus: "Today, Admiral is the U.K.'s number one community pub group and is poised for continued and sustainable success.

Corporate pride

“We are proud of what we have accomplished through our partnership with the Admiral team and continue to believe the UK pub sector is an attractive segment for long-term investors."

Sapient Corporate Finance served as financial adviser to Cerberus. Linklaters LLP served as its legal adviser.