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The City: Punch goes heavyweight

Published:  18 January, 2007

The seven-month auction of Spirit Group is over. Punch Taverns has become Britain's largest pub owner by taking over its rival for 2.7bn. But that is not the end of the affair - far from it. Punch wants to offload up to 1,000 of the pubs that it has just bought because they do not fit its investment criteria. The company is undertaking a review of its newly enlarged 10,000-pub estate.

Spirit came with 1,832 pubs, 750 of which are to be converted to leased businesses because of their comparatively small turnover, with a further 82 already identified for sale as houses or offices. Up to 200 pubs will also be sold off to satisfy local competition issues. Most observers now believe that Punch will put at least a further 500 pubs up for grabs because it does not want to move significantly into the managed-house market. That means, for instance, that the Chef & Brewer chain could

be up for grabs.

And there is already a queue forming. At the head is Mitchell & Butlers, which runs the All Bar One and O'Neill's chains. At one stage Punch and M&B were discussing a joint break-up bid of Spirit. Other probable contenders include Robert Tchenguiz (who was pipped at the post for Spirit), Wolverhampton & Dudley, and Greene King.

Both Wolves and Greene King have recently published figures showing that their separate acquisition sprees re proving beneficial to shareholders. Wolves's annual pre-tax profits were 16% ahead at 90m, with like-for-like sales up 2.8%. The company went out of its way to say that its purchases of Burtonwood, Jennings and English Country Inns had achieved higher-than-expected cost savings of 8.6m. Wolves reckons it could raise up to 500m for the right buy.

Meanwhile, analysts were pleasantly surprised by Greene King's interim results for the six months to 16 October, which were 17% ahead to 56.7m. The company said that Laurel (which it bought for 654m in August 2004), Ridley's (which it took over in July for 46m) and Belhaven (the Scottish brewer bought for 187m in October) had all made notable contributions. Laurel and Ridley's are now fully integrated and delivering synergies ahead of plan, and Belhaven will make a full contribution in the second half of the financial year.

Greene King's shares have soared by more than 20% in the past two months, its dividend has been increased and the balance sheet is healthy, so a further purchase would be manageable, especially since observers believe the shares are undervalued in comparison with Wolves's. But they would both have to fight hard to see off M&B, which is very keen to gain the economies of scale that buying part of the Punch estate would bring.