Last week was grim for the quoted owners of tenanted pubs such as Enterprise Inns (LSE: ETI), Punch Taverns (LSE: PUB) and Greene King (LSE: GNK). MPs passed a bill to get rid of the tied pub – where tenants are tied into deals to buy beer from their pub group landlords.
The tenants have typically paid preferential rents, but inflated beer prices (compared to negotiating separately with a brewer). The profit margins on beer sales have made up a big chunk of the income pub groups get from their tenanted pubs. So how will they cope?
They may just jack up rents to make up for the shortfall, or close and sell more pubs. But whatever they do, Enterprise Inns and Punch are already struggling with crippling debts and this development is not helpful.
There are also implications for Greene King. It has been selling parcels of tenanted pubs and focusing on its managed pub restaurants business, which makes up the bulk of its profits. However, it is in the process of buying the Spirit Pub Company, which will bring 430 more tenanted pubs on board, giving it nearly 1,300 in total.
The combined business will have just over £2bn of debt and its finances will be quite tight until the targeted cost savings come through. So it doesn’t need the hit to its cash flow that the end of the beer tie might bring. I think Greene King is a decent business – but its shares look a little less attractive now.