Neil Collins

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Giles Thorley’s sucker Punch

June 15, 2009

Here is Giles Thorley’s record of maximising long-term value for his shareholders, the aspiration when he floated Punch Taverns in 2002. As you can see, it hasn’t quite worked out, and in order to have any long term at all, the shareholders are being asked to put up roughly last Friday’s entire market capitalisation in new capital.

 Punch is in a hole of its own making, with 4.2 billion pounds of notes secured on 7,900 pubs, and another 275 million of convertible bonds not secured on anything. When these bonds were issued, the expectation was that the soaraway Punch price, then 8.60 pounds, would rise enough to make it worth converting at 11.72 pounds a share.

 When the shares hit 13 pounds in early 2007, it all looked rosy. Unfortunately, the spectacular collapse that followed means the bondholders will want their money back instead, and the pubs are not profitable enough to allow cash to be paid up to the parent. The company admits that the money  will remain trapped next year, when the bonds are due for repayment, and it can’t see any significant improvement in trading.

Thorley’s only way out is today’s fund-raising, along with an offer to repay the convertibles a year early at 95 percent of par value. It’s only possible at all because of  the “dash for trash” which has swept its shares up from 33p to 148p before today’s fund-raising. Unsurprisingly, they were walloped to 120p on today’s news.

Will it be enough? Yes, say stockbrokers Numis, buy the shares. No, respond the bears from Evolution Securities, sell them.

He’s a clever boy, that Giles Thorley, but this is no investment. Punch is so highly geared that the shares are effectively a bet on whether a combination of better management and pub sales can keep the business afloat until trading starts to improve. There are better bets elsewhere.