Things change quickly in hospitality. Yesterday’s £88.4 million equity raising by Young’s came only six weeks after the pub company’s boss said that it would not need to bolster its finances during the lockdown by selling new shares.
Patrick Dardis, 61, the Young’s chief executive, said the group had considered following some peers in raising new equity, but rejected the idea. “Debt is still cheap, so we decided not to go down that route.”
The capital raising came despite his insistence that the scale of the liquidity available to Young’s meant it could cope with a “worst-case scenario, taking us through until pretty much this time next year”.
Young’s, which began as a brewer in Wandsworth, south London, issued new shares equivalent to 19.2 per cent of its current share capital at a discount of about 10 per cent. Retail investors were able to participate, buying £2.7 million of stock through the Primary Bid platform.
The group plans to reopen all its pubs between July 13 and July 20 and said the new funds would enable it to kickstart investment in its pub estate, strengthen its balance sheet and “pursue opportunistic acquisitions”.
This investment opportunity appears to be the key to Mr Dardis’s change of mind. While there is little doubt he could have kept Young’s afloat for 12 months, the restrictions inherent in relying on government-backed loans would have taken growth off the menu. Raising money from the market gives him the flexibility to invest in new and existing pubs. As one analyst put it: “There are two options: you either grow your way out of the crisis through the topline or grind your way out through the bottom line.”
What remains uncertain is the level of trading pubs will be able to generate after they reopen. While the combination of the sun, a staycation summer and pent-up demand are all pluses, the parlous economy, restrictive safety measures such as social distancing and home working will deter plenty of customers as well as cutting capacity by 30 per cent. There may be a flood of customers in the first few days, but the expectation is that operators will have to rebuild business gradually. So what are the prospects for some of Britain’s other quoted leisure companies?
JD Wetherspoon
Debt and a £141 million equity raising gives Tim Martin, the pub group’s founder and chairman, the liquidity he needs, while Wetherspoons is ahead of the curve in ensuring its pubs are “Covid secure” come July 4. Expect him to cut prices to coax customers back through the door, although generating the level of sales necessary to make a decent margin could prove a short-term challenge. Avoid
City Pub Group
A solid start to 2020 was halted by the lockdown, but chairman Clive Watson has been through a few downturns and has acted decisively to cut the cost base. Although rents remain a concern, this is a quality company and a £22 million equity raising has enabled him to cut its bank borrowings by two-thirds. Buy
Revolution Bars
Lockdown came just as Rob Pitcher, the chief executive, was starting to sort out this problem child. A £15 million share placing eased the financial pressure, although this was at a cost of a 42 per cent discount owing to the scale of the issue compared to its £17 million market value. The Covid-19 pandemic threatens to halt the momentum. Avoid
Whitbread
Having handed £2.5 billion to shareholders after the £3.9 billion sale of Costa Coffee to Coca-Cola, Alison Brittain, chief executive of the Premier Inn and Beefeater owner, has reclaimed £1 billion via a rights issue. It may sound bizarre, but it’s a pragmatic move that will ensure the FTSE 100 group emerges as strongly as any company from the crisis and in prime position to take advantage of growth opportunities. Buy
The Restaurant Group
Andy Hornby is in firefighting mode at the casual dining group, exiting most of the Chiquito chain via an administration, deploying a company voluntary arrangement to shed 125 mainly Frankie & Benny’s outlets and raising £57 million of new equity. Refocusing the business on the excellent Wagamama and Brunning & Price brands is sensible, but the road to success is still long and painful. Avoid
Loungers
It was all going so well. Yet only a year since it floated at 200p a share, the operator of the Lounge and Cosy Club café-bars is languishing at 127p. However, this is a business that is constantly evolving to stay relevant, while its value-for-money proposition should resonate with a post-Covid audience. Its recent £8.3 million share placing provides an extra buffer. Buy
Mitchells & Butlers
One of the few pub groups not to issue shares, but with a well-invested estate and no apparent desire for acquisitions, the £100 million loan secured should provide all the liquidity it needs. Hold
Marston’s
Another pub company to sidestep an equity raise, although it didn’t need one. Instead, Ralph Findlay, chief executive, formed a £780 million joint venture with Carlsberg, collecting £273 million of cash to reduce debt. Pulling this rabbit out of his hat doubled the share price, but it could have further to go. Buy
Fuller’s
The pub operator had already improved its finances before Covid-19 hit by offloading its brewing business to Asahi, of Japan. The family-controlled group has high quality assets and is well-placed to emerge strongly from the lockdown, although its London concentration will not be helped by work-from-home commuters. Hold
Domino’s Pizza
Its sales would suggest the pizza delivery outfit has been one of the lockdown winners, but it has been weighed down by extra costs and the drag of trying to sell its loss-making Nordic businesses. A strong new management team promises much, however. Hold
Hollywood Bowl
The ten-pin bowling operator and its close rival Ten Entertainment were bitterly disappointed to miss out on a July 4 reopening date, but they shouldn’t have long to wait. Both are well run and with new equity worth £10.9 million and £5 million, respectively, in their wallets, the prospects look positive. Buy
The Gym Group
Another company to miss out on a July 4 opening, but when health clubs are given the green light, The Gym Group is well-placed to continue its impressive rollout strategy. Hold
