A Punch on the nose for the bears

April 8, 2009

REUTERS— Neil Collins is a Reuters columnist. The opinions expressed are his own —

LONDON, April 7 (Reuters) – One share in every five in Punch Taverns <PUB.L> has been lent by its owner to the short sellers, who over the last couple of years have made more than enough to cover the bar bills.
Yet in the last fortnight, the Punch price has got off the floor and hit back, doubling from 40p to 80p. Why?
Pubs have endured the perfect storm, as new health’n’safety rules have been piled on to a raised minimum wage and the smoking ban. Meanwhile, supermarkets have exploited a  relentless campaign against drink driving by making it cheaper to drink at home.
Every storm eventually abates, and this one may be easing. The professionals in the industry like Mitchells & Butler <MAB.L>, Marston’s <MARS.L> and JD Wetherspoon <JDW.L> are all making more optimistic noises.
The groups, which are essentially financial constructs that happen to sell beer, had been priced for bankruptcy, an outcome which now looks marginally less likely.
True, things still look pretty grim. Globe Pub Company, Robert Tchenguiz’s card in this game, is already in the hands of its bondholders following a technical default. Punch, the next weakest, is struggling to find the cash to repay its 224 pound ($334.2) million convertible due next year.
Its problem is that most of its pub estate is in three securitized vehicles that must generate threshold amounts of cash before they can pay anything up to the parent. Too little, and the cash is trapped; much too little, and the lenders take over the portfolio.
Punch is a debt mountain built on a sliver of equity; even after the doubling of the share price, its market capitalisation represents only 4 percent of the enterprise value of the business.
The shares are an option on the financial engineers at Punch finding a way to hang on long enough for the storm to pass.
They then have to work out how to compete with those companies that know about the business, which are now gaining market share from the engineers.
No wonder some brokers, such as Evolution Securities, are saying sell. The bears may yet swing the final Punch.
(Editing by Malcolm Davidson)

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