Broker snap: MPs' report a bitter blow for pubcos

13th May 2009 12:00

A Parliamentary report calling for the reform of the business model adopted by pub companies has sent the sector into a tailspin.The report has called on the Competition Commission to investigate the tied arrangement - referred to in the trade as 'wet rent' - that requires pubs to buy beer and other items from their landlords.'Previous reviews have concluded the beer tie delivers advantages and that if the wet rent fell, pubcos could legitimately recover lost revenue through an increase in ordinary rent. If (big if) there were to be a review it could come to a different conclusion this time: the wet rent could be seen as an unfair way of sustaining overall rental income which would otherwise be in decline,' says Nigel Parson at Evolution Securities.Parson was bearish on Punch Taverns (sell) and Enterprise Inns (reduce) prior to the publication of the report and believes the uncertainty caused by the investigation will weigh on shares in the sector until it is resolved.An independent survey commissioned by the MPs found that almost two-thirds of lessees did not think pubcos added any value.Blue Oar Securities analyst Mark Brumby makes the case, however, that even if the Competition Commission does launch an investigation, it does not necessarily follow that it will recommend that the tied-house system be abandoned.'Even if the tie were outlawed, dry rents would presumably rise such that the incomes of both lessee and property owner were broadly unchanged. Indeed, because dry rents do not vary with turnover and wet rent does, the lessees could find themselves taking on extra risk,' Brumby notes.Though the report is generally regarded as taking aim at the pure pubcos, which is to say those that do not also operate as brewers, Peter Luff, the chairman of the committee that produced the report, said that doing away with the tied-house system altogether may put too much power into the hands of the brewers and wholesalers.Quoted brewers that also have sizeable pub estates include Greene King, Marston's, Fuller, Smith & Turner and Young & Co..