Punch Taverns (LSE: PUB) has had a dramatic fall from grace. Its debt-fuelled business model saw it become Britain’s biggest pub landlord during the credit boom. The bust that followed all but destroyed the company. And it is not out of danger.
Its finances are still a complete mess – it owes £2.3bn of debt, but has just £119m of tangible equity, according to its last annual report.
The company is trying to dig its way out of this gigantic hole. Its plans rest on convincing 75% of its bondholders and shareholders to accept a £600m debt-for-equity swap to give the company breathing room.
Punch is still short of the numbers it needs – but it would seem that shareholders have little alternative but to agree, even though it would see them retain only 15% of the shares in the company.
A lot of this dilution is probably already priced in to Punch’s shares. So, the question is: is this a recovery play? My guess is probably not.
Although Punch is profitable, most of its money will still end up in the hands of its lenders, as it will still have a huge debt pile. A more pressing problem – should the company survive – is the lack of investment in its pubs, which is harming its ability to compete for customers.
Over half of Punch’s estate has had nothing more than repairs and maintenance over the last five years. This will take a lot of time and effort to address. For my money, Punch is not a promising turnaround play yet.