That’s the conclusion of the House of Commons Business & Enterprise Committee report on pub companies published on Wednesday morning.
MP’s on the committee are of the opinion that abuse of the tenant occurs under the “tied” business model and they want something done about it.
In fact, they want Punch and Enterprise Inns sent to the Competition Commission and are urging Secretary of State Peter Mandelson to use powers in the Enterprise Act 2002 to initiate the investigation, bypassing the OFT which declined to refer the matter in 2004.
Given the industry’s inability to reform itself in the past, Department for Business, Enterprise & Regulatory Reform needs to look urgently at the inequalities of bargaining power between pubcos and lessees. Recommendations to improve the transparency of rent assessment should be implemented. The practice of pubcos selling buildings they no longer require with restrictive covenants preventing their use as a pub should be banned.
There are strong indications that the existence of the tie pushes up prices not just to lessees but to consumers. However, we are wary of simply recommending that it should be abolished; such a move might simply increase the power of brewers or distributors. The OFT has declined to act in the past; we recommend that the Secretary of State refer the matter to the Competition Commission for urgent investigation by a body which has no vested interest in defending its earlier position
Predictably, Punch is furious, but then wouldn’t you be if you were labouring under billions of pounds of debt securitised for the next 30 years?
Here’s the company’s response:
Punch Taverns believes that the British pub is an enduring business model that plays a crucial role at the heart of our communities. Long term relationships with our licensees are the foundation of our business. We believe we have made substantial positive progress regarding our engagement with licensees since the 2004 Trade and Industry Select Committee report and we continue to play a significant role in supporting our licensees through the current challenging economic conditions. We strongly believe that the tied pub model provides a fair and equitable approach to sharing risk between ourselves and our licensees, represents a low cost opportunity for entrepreneurs, and has a rightful place in the market.
Strangely nothing from Enterprise…yet.
Wednesday’s news had something of a dampening effect on the share prices of Punch and Enterprise – both of which enjoyed stellar gains during the recent dash for trash. They were both off around 15% in early trading.
Analysts, however, are fairly sanguine. They note that the government does not have to follow the committee’s recommendation and the chances of the “tie” being found anti-competitive are small.
KBC Peel Hunt
There is no compulsion on government to follow these recommendations. But there is an outside chance that government may take the opportunity to divert attention from other issues by once again making the pub industry a political football.
Possibility of an investigation finding tie anti-competitive even smaller. Even if an investigation takes place, we believe that once again, the possibility of the Competition Committee actually finding that the tie is anti-competitive is remote.
Morgan Stanley
Risk to Punch Taverns and Enterprise Inns. The Government has two months to respond to the report, and there is a chance the Secretary of State does not take up the BEC’s recommendation. We think it unlikely that the Competition Commission tries to abolish the tie, which has for decades provided a low cost of entry into the pub industry, and upon which many smaller brewers rely. However, the Commission could argue for a less opaque rental assessment, remove the machine tie, introduce some cap on pub numbers, or demand a free of tie alternative. With net debt now at or over 8x EBITDA, we see little room for Punch and Enterprise to share more of their profits with their lessees.
And here’s a really, really angry analyst – Douglas Jack of Numis. He’s reckons the report is totally one sided and is based on responses from just 1,000 licensees.
The BEC report states that it had “neither the resources not investigative powers to reach firm conclusions on every issue”. Nor does its “recommendations carry the force of law.” The OFT has already rejected it, stating that “there is no significant competition problem in relation to the beer and pub market”. Strong opinions within the BEC review could unsettle share prices in the short-term, but whether it leads to anything further than what the pubcos are already doing is questionable.
The BEC Report appears like a one-sided result of asking 1,000 licensees if they think they are overpaid. It fails to prove whether tenants would be better off as free traders, and when it considers the cost of tenants being tied on beer, it over-states pubco beer discounts by c20% and free trade discounts by over 50%.
Normally, any change would involve a Secretary of State referral to the OFT, which could reject it, investigate or refer it to the Competition Commission. Obviously. the BEC wants a direct referal to the latter, which responsibility is to the consumer, for whom CGA and AC Neilsen data proves that tenant retail drinks retail prices are little different to managed. Such an investigation could take years.
Related links:
Call for inquiry into pub trade – FT
Lotting premiums, covenants and Enterprise Inns – FT Alphaville
Time for a reality check at Punch Taverns – FT Alphaville