The board of pub group Spirit says it has indicated “that it would be willing to recommend” Greene King’s takeover proposal of 109.5p a share, or £723m. So it should be. This should be a case of: where do we sign?
At that price, Greene King would be paying almost 16 times Spirit’s expected earnings this year of 6.9p per share. From Spirit’s point of view, that’s too rich to refuse when consumers’ real incomes are still under pressure.
At 109.5p, Spirit shares would have doubled since the demerger from Punch Taverns in 2011. Before Greene King made its move, they stood at 75p. A take-out above 100p would be a very decent return from a company that, despite chipping away at its debt in recent years, still carries a highly leveraged balance sheet. Net debt was £706m at the end of the last financial year, or 4.7 times its top-line operating profits, otherwise known as earnings before interest, tax, depreciation and amortisation (ebitda).
The drawback to Greene King’s offer is the fact that it is almost entirely in shares. But there’s no alternative. Greene King’s financial gearing is itself high at a little over 4 times ebitda last year. The bidder, then, is relying on cost savings to make the numbers on this deal add up. Broker Oriel chalks up £30m, which it thinks is enough to enhance Greene King’s earnings from the off.
Maybe, but Greene King is still paying a full price for the privilege of being able to boast that it will be the biggest pub company in the UK by revenue (£2bn) and ebitda (£450m). A takeover premium of 45% to the previous market price is rarely cheap.
