Greene King (GNK) Ord 12.5p
HL comment (6 September 2019)
Greene King has released a brief trading update covering the 18 weeks to 1 September 2019. Results in all three divisions have dipped on a like-for-like basis, which the group says reflects a tough comparison following last year's men's World Cup and good weather.
The shares were unmoved on the news.
In August the Greene King board recommended an all cash offer for the business from Hong Kong listed CKA, however the deal is subject to regulatory and shareholder approval.
The offer price of 850p per share is a 51% premium to the closing price of Greene King shares the day before the deal was announced, and values the business at £4.6bn (including debt).
Given the premium on offer, it's hard to see Greene King shareholders being anything but delighted by CKA's bid for the company. The shares haven't traded at 850p since back in 2016, and a tough competitive environment and deteriorating economic environment means the outlook was hardly rosy.
CKA's willingness to attach a hefty price tag has probably been helped by the fact it's already pretty familiar with the Greene King business. The group founded by Li Ka-shing, Hong Kong's richest man, has leased pubs to Greene King since 2016. In fact we suspect it's the value of the group's real estate assets - valued at some £3.5bn at the end of the last financial year - that attracted the interest.
Prior to the offer the company traded at a price to book value of 0.83 times - implying the core pub business was actually detracting from the value of the underlying assets. Given pulling pints and flogging fry-ups is still reasonably profitable, and paying a sizeable dividend, CKA clearly thought that wasn't a fair reflection of reality.
Greene King has more than tripled its dividend payment since the late 90s, and income seekers will be sorry to see it go. However, we think the deal is a good one for investors, and an intriguing vote of confidence in the UK pub sector ahead of the UK's exit from the EU.
Pub Company like-for-like sales were down 1.8% over the 18 weeks to 1 September. In Brewing & Brands, total beer volumes were down 6.5% and own-brewed volumes were down 7.9%. Pub Partners net income was down 4.2% for the first 16 weeks, driven by softer beer sales against last year's comparatives.
Cost mitigation and pub disposals remain on track, with the group expecting to limit net inflation this financial year to £10m-20m and complete the sale of 85-95 pubs generating disposal proceeds of £45m-55m.
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Previous Greene King updates
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