Company in the news: Punch Taverns

Punch Taverns is trying to dig itself out of a big hole. But this is no recovery play, says Phil Oakley.

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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.

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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 themretain only 15% of the shares in the company.

A lot of thisdilution is probably already priced in to Punch's shares. So, thequestion is: is this a recovery play? My guess is probably not.

Although Punch is profitable, most of its money will still end upin the hands of its lenders, as it will still have a huge debt pile.A more pressing problem should the company survive isthe lack of investment in its pubs, which is harming its abilityto compete for customers.

Over half of Punch's estate has hadnothing more than repairs and maintenance over the last fiveyears. This will take a lot of time and effort to address. For mymoney, Punch is not a promising turnaround play yet.

Verdict: avoid

Phil Oakley

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

 

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

 

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.

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