The past five years have seen a revolution in the brewing and pub industry. A sector once dominated by the brewing giants has slowly become the preserve of the City financial institutions which have been keen to get their hands on the regular stream of income to securitise.
Legal director and company secretary at Bass Leisure Retail (BLR), Bronagh Kennedy, has been at the forefront of these changes. She joined the group in 1996 as the only in-house lawyer at BLR and became the first female director at Bass when she was promoted to the BLR board last year.
The pub and restaurant division of Bass is virtually unrecognisable from the group that Kennedy joined back in 1996. Then it was a mixed estate of pubs with vertical ties to Bass Brewers and there were no restaurants.
Slowly, but surely, the group has sold off its pub outlets and repositioned the retail estates towards high branded restaurants, bars and pubs. Last year, Bass took the radical step of selling off its entire brewing operation to Interbrew for £2.3bn.
This refocusing is now typical of the sector. The changes were instigated partly by the Beer (Tied Estates) Order in 1989, which capped the number of UK pubs a brewery could own. Brought in to attack the perceived non-competitive nature of the industry, it encouraged the larger breweries to divest of pubs.
And there were willing buyers – the vultures gathered in the form of the financial institutions, which were eager to reap the benefit of the regular income stream.
Bass’ £625m sell-off of 988 pubs to Nomura this year made the Japanese investment bank the biggest pub landlord in the UK, followed closely by privately-owned operator Punch Taverns.
And new buyers from the private equity camp are circling – Candover, Deutsche Bank’s Morgan Grenfell Private Equity and Legal & General Ventures all look set to follow its lead.
Securitisation has been the main driving force behind the move by the investment banks to dominate the pub market. Pubs are naturally good for debt financing – a cash-rich business with sufficient income to finance the debt, explains Kennedy.
Her background in corporate insolvency work has proved invaluable.
“We had to be familiar with securitisation since we had to show the financial institutions how it could be done,” she says. But Kennedy adds that when she joined the group she had little idea this would be the case.
“I really wanted to see something grow rather than oversee the insolvency of the group. I had no idea my background in finance and insolvency would help me to the extent it has,” she says. “I was lucky that the changes in the group have played to my strengths.”
Kennedy trained at Gouldens and was seconded to the corporate recovery department of Touche Ross shortly after qualifying. In 1991 she joined Allen & Overy (A&O) and for two years worked with A&O partner Peter Trotter on the Canary Wharf receivership.
A&O was brought in as receiver and it was this experience that attracted Kennedy to a business role.
“I was based at the Canary Wharf offices,” she says. “It suited me. I found being in the middle of the business interesting. My contacts with the group were across the board – from dealing with management to literally stopping the contractors walking off with the tools and bricks because they had not been paid.”
From Canary Wharf, Kennedy went to Ferranti, where she again became a “permanent fixture in the offices” overseeing the receivership.
Coming up for partnership, Kennedy decided to move to an in-house role. Fuelled mainly by the experience of working closely with businesses in insolvency work, it was also lifestyle choice. “The hours were very long,” she says. “I had cancelled loads of holidays, postponed my wedding and was called back from a family funeral… I thought, do I really want to do this for the rest of my life?”
So in 1995 Kennedy moved to Bass Leisure Retail as its first in-house lawyer.
Thinking she had escaped the burden of timesheets and long hours, Kennedy was thrown into the buyout of 78 restaurants from the Harvester group as soon as she joined. It was the group’s first major acquisition – aside from the purchase of Holiday Inns in the US in the 1980s.
Kennedy says one of the main challenges was shifting the mentality of BLR, which had hardly changed its focus in two centuries of trading.
“I found there was this bizarre mentality – ‘Oh, we cannot possibly buy all 78 Harvesters on one day. Why can’t we just buy two at a time?’ It was a question of persuading people that we could do it,” she says.
The deal was completed in December 1995 and Kennedy had almost two years to bed down the legal function before the next transaction in 1997 – the £35m purchase of seven outlets from restaurant chain Browns.
Having moved in-house to get her life back, Kennedy found herself holed up in the offices completing the deal on New Year’s Eve. She takes part of the responsibility for this. “You tend to blame the job for the hours that you work,” she says, “but then you realise it was, in fact, down to you driving yourself.”
This was followed in quick succession by the sale of 1,500 pubs to Punch in April 1998. The first acquisition by Hugh Osmond’s Punch Taverns (now the second-largest owner of pubs behind Nomura), the transaction stood out, Kennedy says, as the first leveraged finance deal on the market.
“It was incredibly complex, but also very exciting. Nomura and Punch went head to head on the buyout all the way to the end. Osmond had to pull out at one stage because his backers fell away, only to come back again,” she says.
It was Punch’s first foray into the pub market, so there was little infrastructure in place. Kennedy says the deal included provision for Bass to provide transitional services – including human resources, payroll and accountants – for six months.
The relationship that grew with Punch over this period led to the next major transaction for BLR, when Punch entered the bidding war against Whitbread for Allied Domecq’s 3,600-pub estate.
Whitbread and Allied Domecq had virtually sewn up the deal, when Punch approached Bass for support. “Hugh came to us and said I don’t like this – what can we do? The economics of the estate were such that the top end of the business would fit into our portfolio and we agreed to join forces with them,” Kennedy says.
The joint bid was successful – under the $4.4bn deal, BLR bought 550 of the pubs. But Kennedy missed out on the logistics of the deal because she was on maternity leave.
She says the strength of the management team and the close relationship with A&O meant her absence was less of a problem than it might have been. “It worked well. A&O knew the business well and the business knew the partners at the firm,” she says. “It is important that they are working with someone they rate and feel comfortable with.”
Kennedy was invited to come back from maternity leave two months early to oversee the integration of the pubs into the business.
Last year’s sale of the breweries was overseen by former head of legal at Bass, Richard Winter, who has since become company secretary to the main group. But Kennedy says her involvement in the transaction was “quite heavy”, since the sale of the breweries impacted on the supply contracts to the bars and pubs in the retail and leisure division.
This year, Kennedy has completed the $870m (£606m) sale of the 988 pubs to Nomura. Once again, it was a two-horse race with private equity group Legal & General Ventures. The sell-off of the smaller, managed pubs marked a further step by Bass to focus on leisure activities and around its larger outlets, including All Bar One and O’Neills.
As the only lawyer in her department, Kennedy works closely with her external advisers. She is also an advocate of working closely with the business units. She creates a “virtual team” of experts from every discipline. This for her is key to the smooth running of not only the transactions, but the subsequent successful integration or separation involved.
For her, this is key to the smooth running of transactions. “There is a huge pool of knowledge and expertise there,” she says, “from people in HR, through to IT and finance. I bring them together as a team to talk through the transaction so we can identify the issues,” she says.
All the signs are that the group will continue its repositioning in the marketplace and with ever more financial institutions ready to enter the pub market, it is unlikely to be short of takers.
Kennedy says the passing of the old-style managed house estate was bound to happen with the abolition of the tied estates order and the increased costs and complexity of the managed business that came with the national minimum wage and employment regulations.
The City filled a useful gap in the market.
“It was inevitable brewers were going to sell off their estates,” Kennedy says. “If securitisation had not been there, what would have happened to the pubs?”
Bass Leisure Retail external advisers
Allen & Overy (A&O) (right) has scooped most of the work for Bass Leisure Retail in the past five years.
A&O, Kennedy’s old firm, was first instructed on the sale of 1,500 pubs to Punch Taverns in 1997.
Corporate partner Susan Howard, who Kennedy knew from her A&O days, has led the advice to BLR on most of the transactions since.
It was the financial expertise – particularly in the securitisation market – as well as familiarity, that drew Kennedy to the firm.
“I knew we would be dealing with people who had leading financial expertise and wanted advisers that were conversant with this,” she says. But the ability to work with the team from across the divisions is as crucial as the technical expertise.
“There is no point in me going to a lawyer who is just technically brilliant,” she says.
“It is as important for the law firm to be able to work with the team within Bass.”
This paid off when Kennedy was away on maternity leave for the joint acquisition with Punch. Internally, the deal was overseen by a “very strong” management team, which already knew the team at A&O.
Kennedy says she keeps a close eye on fees and always negotiates a discount with the firm.
Bass’ Richard Winter spoke out last year about the number of hours worked by lawyers in private practice. Kennedy says the letter of engagement limits the external advisers to a maximum of 10 hours a day, but there is room for negotiation where the deal demands longer hours.
She is realistic about this. “No-one wants to see anyone working to the detriment of their health and efficiency, but you have to recognise there are a certain number of unsociable hours in this job.”
BLR also instructs Eversheds for property work.
