Beer, bonds and brokers

Nomura may now be Britain's biggest pub owner, but it's more interested in securities than serving drinks. Liza Roberts reports

When Nomura Securities became Britain's biggest pub owner last week, more eyebrows than pint pots were raised in the City, even if the purchase may lead to cheaper beer.

After all, Grand Metropolitan and Fosters Brewing Group had been eager to unload the 4,300 public houses of their jointly owned Inntrepreneur and Spring Inn subsidiaries as low-yielding, non-core businesses. The price - pounds 1.2bn - struck some analysts as expensive, especially as pubs face declining beer consumption and increased competition from theme bars.

So what does a Japanese brokerage company know that these veterans of the drinks sector don't?

For one thing, Nomura has had two years' experience in the business. It bought Phoenix Inns in 1995 and manages 1,130 pubs. More importantly, the Japanese brokerage believes there is gold in those public houses, in the form of 4,300 long-term leases.

All that steady cash flow can be "securitised" - a complex technique used by bankers to convert cash flow into securities - to fund the acquisition. The business of the pubs is, to a large degree, beside the point.

Nomura is not letting on precisely what it will do, but a spokesman says securitisation is "almost certainly" in its plans, and a sale or flotation in a few years is likely. Securitisation is something Nomura's London operations has made a specialty in the past two years.

Led by Guy Hands, the managing director of Nomura International's Principal Finance Group, the company has completed more than $11bn in securitisations since 1995, including the pounds 944m securitisation of Angel Trains, which the government sold as part of its rail privatisation programme; the pounds 904m securitisation of Annington Homes, a group of 57,000 Ministry of Defence houses; and the pounds 249m securitisation of Phoenix Inns.

Last week, Nomura emerged as the likely buyer of the William Hill betting shops chain. There was no comment, but betting shops are another strong cash flow business which would make a good securitisation candidate.

Pub rent-backed bonds would take the form of a bond backed by rental income, with a pool of leases as underlying collateral. The income would be used to make the interest and principal payments on the bonds. "Over the years they will expect a reasonable payback from the bonds, and then they presumably intend to float or sell the estate in a few years' time," says Matthew Jordan, an analyst at ABN Amro.

By selling, Nomura could shift the leases off its balance sheet, freeing up its capital for new business. Because the bonds would be backed by a pool of assets, they would be likely to have high credit ratings, and interest payments would probably be lower than on the underlying leases. The difference would be Nomura's profit margin.

"The value of the assets depends on how you can finance them," Mr Hands said recently. "Clearly, the more cheaply you can finance the asset, the more cash flow is left over and the more valuable the asset is. What one is really saying is that the assets are worth more because of the cash flows they generate than because of the value of the asset."

Potential investors say pub-backed bonds could be attractive. "It's a way of producing high-yielding fixed-interest securities, and that's why we would consider it," says Paul Mingay, investment manager at Norwich Union. The fact that the securities would be backed by pubs will not necessarily be part of the equation, he says. "We'd look at the strength of the leases."

Securitisation expert Brian Olasov, a capital markets consultant at the law firm of Long Aldridge & Norman, says the broader market wants bonds like these. "There is so much appetite at the institutional-investor level for a securitised product," he says. "I would think that this would be a pretty successful placement."

Nomura is not commenting on how the securities will be structured, but Mr Olasov predicts they will be issued in tranches, with a likely AAA- grade for the top level. Yields in the upper teens to low 20s are likely for the lower tranches.

Nomura emphasises that its immediate objective is to improve the pub business. "The aim is to create value," says James Turner, director of the Grand Pub Company, which Nomura established to run Phoenix, and which will manage the new acquisitions. Mr Turner will first visit as many pubs as possible. "We need to look at each and every site to see how we can develop each one - whether that's investing in the site, or focusing on commercial incentives, or, in some cases, selling."

A key part of the strategy to improve pub profits is to renegotiate a six-year-old beer supply contract between the Inntrepreneur and Spring Inn pubs and Scottish Courage, a subsidiary of Scottish & Newcastle, to which the pubs are "tied". Nomura's Phoenix pubs are not tied to any brewery.

The Scottish Courage contract expires on 28 March, the same day the Inntrepreneur and Spring Inn acquisition is due to be completed. "There's a fair amount of purchasing power within these estates which we would share with licensees," Mr Turner says.

Combined, Inntrepreneur and Spring have about 3 per cent of British beer sales. "The obvious thing they can do to improve profitability is to decrease the beer prices," says Russell Duckworth, analyst at Deutsche Morgan Grenfell. "There should be scope to reduce them fairly significantly."

Some of Inntrepreneur's lessees have taken the company to court in an effort to extract themselves from the ties, and to work out lower beer prices. "Those problems have to be sorted out if Nomura is eventually to float the group or sell it for the right price," says Matthew Jordan. He calculates that Nomura paid about pounds 100m more than his estimate of the pubs' value in two years' time, when Nomura might consider a sale or flotation. And his figure factors in increased profitability from presumed beer discounts.

Nomura will be bucking more than steep beer prices in its quest to add value. In the past decade, pub beer sales have fallen about 10 per cent, according to Tim Hampson at the Brewers' and Licensed Retailers' Association. Fewer young people and fewer heavy industry jobs means fewer men regularly consume three or four pints at a time. The market today demands more food in pubs, and a more family-friendly atmosphere, he says. That means many pubs require refurbishment.

Some analysts question whether Nomura will invest much in the pubs, pointing to the 20-year leases requiring tenants to make full repairs and improvements. Mr Turner says it is too early to say how much the company is willing to invest.

Still, Nomura says it is confident it can recoup its investment. "Whatever exit we eventually decide on, we will have hoped to have added value and to exit from it with a profit," Mr Turner says.

Suggested Topics
Voices
voicesGood for Lana Del Rey for helping kill that myth, writes Grace Dent
Sport
The Pipes and Drums of The Scottish Regiments perform during the Opening Ceremony for the Glasgow 2014 Commonwealth Games at Celtic Park on July 23, 2014 in Glasgow, Scotland.
Commonwealth GamesThe actor encouraged the one billion viewers of the event to donate to the children's charity
Sport
Karen Dunbar performs
Entertainers showcase local wit, talent and irrepressible spirit
Sport
Members of the Scotland deleagtion walk past during the opening ceremony of the 2014 Commonwealth Games at Celtic Park in Glasgow on July 23, 2014.
PROMOTED VIDEO
Arts and Entertainment
The Tour de France peloton rides over a bridge on the Grinton Moor, Yorkshire, earlier this month
film
Life and Style
fashion Designs are part of feminist art project by a British student
News
Very tasty: Vladimir Putin dining alone, perhaps sensibly
news
Life and Style
Listen here: Apple EarPods offer an alternative
techAre custom, 3D printed earbuds the solution?
Arts and Entertainment
Top guns: Cole advised the makers of Second World War film Fury, starring Brad Pitt
filmLt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a uniform
News
The University of California study monitored the reaction of 36 dogs
sciencePets' range of emotions revealed
News
Snoop Dogg pictured at The Hollywood Reporter Nominees' Night in February, 2013
people... says Snoop Dogg
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
A scene from Shakespeare in Love at the Noel Coward Theatre
theatreReview: Shakespeare in Love has moments of sheer stage poetry mixed with effervescent fun
News
Joining forces: young British men feature in an Isis video in which they urge Islamists in the West to join them in Iraq and Syria
newsWill the young Britons fighting in Syria be allowed to return home and resume their lives?
Arts and Entertainment
The nomination of 'The Wake' by Paul Kingsnorth has caused a stir
books
News
i100
Life and Style
food + drinkZebra meat is exotic and lean - but does it taste good?
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

PMO Analyst - London - Banking - £350 - £400

£350 - £400 per day: Orgtel: PMO Analyst - Banking - London - £350 -£400 per d...

Cost Reporting-MI Packs-Edinburgh-Bank-£350/day

£300 - £350 per day + competitive: Orgtel: Cost Reporting Manager - MI Packs -...

Insight Analyst – Permanent – Up to £40k – North London

£35000 - £40000 Per Annum plus 23 days holiday and pension scheme: Clearwater ...

Test Lead - London - Investment Banking

£475 - £525 per day: Orgtel: Test Lead, London, Investment Banking, Technical ...

Day In a Page

Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform
Climate change threatens to make the antarctic fur seal extinct

Take a good look while you can

How climate change could wipe out this seal
Should emergency hospital weddings be made easier for the terminally ill?

Farewell, my lovely

Should emergency hospital weddings be made easier?
Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

Crowdfunded novel nominated for Booker Prize

Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned

Vladimir Putin employs a full-time food taster

John Walsh salutes those brave souls who have, throughout history, put their knives on the line
Tour de France effect brings Hollywood blockbusters to Yorkshire

Tour de France effect brings Hollywood blockbusters to Yorkshire

A $25m thriller starring Sam Worthington to be made in God's Own Country
Will The Minerva Project - the first 'elite' American university to be launched in a century - change the face of higher learning?

Will The Minerva Project change the face of higher learning?

The university has no lecture halls, no debating societies, no sports teams and no fraternities. Instead, the 33 students who have made the cut at Minerva, will travel the world and change the face of higher learning
The 10 best pedicure products

Feet treat: 10 best pedicure products

Bags packed and all prepped for holidays, but feet in a state? Get them flip-flop-ready with our pick of the items for a DIY treatment
Commonwealth Games 2014: Great Scots! Planes and pipers welcome in Glasgow's Games

Commonwealth Games 2014

Great Scots! Planes and pipers welcome in Glasgow's Games
Jack Pitt-Brooke: Manchester City and Patrick Vieira make the right stand on racism

Jack Pitt-Brooke

Manchester City and Patrick Vieira make the right stand on racism
How Terry Newton tragedy made iron men seek help to tackle their psychological demons

How Newton tragedy made iron men seek help to tackle their psychological demons

Over a hundred rugby league players have contacted clinic to deal with mental challenges of game