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. Last Updated: 07/27/2016

Pubs Make for Cozy Investment Targets

LONDON -- In Europe this year, some of the most frenzied deal-making is centered around one of the oldest and once stodgiest of institutions, the British pub.

On Friday, the British beer producer Scottish & Newcastle is expected to receive at least five bids for its 1,500 pubs, which include those under the Rat and Parrot and T & J Bernard names. Analysts value the chain at about ?2.5 billion ($4 billion).

The deal, expected to close by the end of the year, could be followed quickly by several others, analysts say, as the pub business continues a consolidation wave that began a decade ago. Traditionally, beer brewers have owned the pubs in Britain, and would serve only their own brews.

A decade ago, the Beer Orders, a government rule, forced brewers with more than 2,000 pubs to sell them off, to prevent the dominant beer producers from remaining the dominant distributors. The law cut the beer industry in half, with most opting to be either a brewer or a pub owner. Scottish & Newcastle, falling under the 2,000-pub limit, is among the last brewers to sell its pubs.

A string of deals since then, however, has left the pub side dominated by big chains. The 10 largest companies now own 43 percent of the country's pubs, Standard & Poor's reported.

The Scottish & Newcastle deal is attracting attention from more than just its retail competitors. Along with pub chains including Pubmaster, Mitchells & Butlers and the Laurel Pub Company, interested bidders include the private equity groups BC Partners, CVC Capital Partners and Cinven, and property investors including David and Simon Reuben, and Hugh Osmond, as well as the French bank Paribas.

BC Partners has banded with Pubmaster. But as of this evening, how the rest of the parties would align themselves remained in flux.

"Everyone is talking to everyone else," said one person close to the negotiations. "This is the most extraordinary situation I've ever seen."

If Mitchells & Butlers is not the winning bidder for Scottish & Newcastle, Mitchells itself could be the next to succumb to consolidation, analysts said. Mitchells & Butlers, a 2,105-pub chain, rebuffed two buyout offers this spring.

British pubs are naturally attractive to investors because of their steady revenue streams. In Britain, about 65 percent of beer is consumed outside the home, compared with only about 25 percent in the United States. Many Britons have a "local," a pub around the corner from their home or office, that is a regular stop after work, on a weekend or even at lunchtime. Laws dating back to World War I, intended to make sure that factory workers put in a full day, force them to close at 11 p.m., but while open, they draw a constant stream of patrons.

"People drink in a good and bad economy," Peter Hansen, president of P. C. Hansen & Company, a corporate finance adviser to the industry based in London. "It is not a recession-sensitive industry."

The overall numbers are staggering. Britain is home to about 65,000 pubs, with sales of ?23.3 billion ($37 billion) in 2001, according to the Mintel International Group, a consulting firm. A direct U.S. comparison is hard to come by because most bars in the United States are individually owned and so do not report sales. But as a guideline, that 2001 figure for British pubs nearly matched the $40.6 billion generated that year by all McDonald's restaurants worldwide including franchises and joint ventures.

Besides their sales streams, the business potential of pubs has drawn investors. British pubs have moved away from their smoky, sleepy roots; many owners have opted to replace brass lamps, carpet and flocked wallpaper with wood floors and big plate-glass windows and update the traditional pub menu.

Along the way, these chains also became highly sophisticated financial entities. Guy Hands, former private equity specialist at Nomura Securities in London, was the first banker to realize, in 1998, that Britain's steady stream of beer consumption, along with the rents paid by pub franchises, would translate perfectly into securities. Now there are $6.5 billion in "beer bonds" outstanding, according to Standard & Poor's.

Some pub companies are so well tuned to their sales trends that they rely on complicated financial instruments like weather derivatives to hedge their exposure against cloudy weather, when patrons drink less than on sunny days.