Interactive Investor

Is Greene King's bid for Spirit a done deal?

20th October 2014 12:22

Harriet Mann from interactive investor

Greene King's second attempt at buying Spirit Pubs stands a good chance of success after the pub chain bumped up its offer to 109.5p per share. Spirit chiefs said they'd back a deal at that level and are in talks with their opposite numbers at Greene King to thrash out terms. The City is clearly confident and Spirit shares have been chased to an all-time high.

Ahead of its final results on Wednesday, Spirit said shareholders will get 0.1322 Greene King shares per Spirit share, but just 8p in cash, which includes the 2014 final dividend. Of course, Spirit shareholders will have wanted a greater proportion of this largely paper deal in cash, but Peel Hunt plays down the risk.

"There are clearly risks to accepting a largely all share offer in a volatile market but, if Greene King can secure the deal at the current level and structure, these risks should be diminished," says the broker.

Greene King has until Thursday 30 October to make a firm offer. Last month, an initial offer of 100p was rejected by Spirit, which said it undervalued its business and prospects. Brokers Shore Capital agreed, adding that with shares of 100p the stock trades marked discount to the most recent sector deal and also to Greene King's EV/EBITDA multiple.

"We see a valuation of 125p per share, or 9 times 2015 forward earnings before interest, tax, depreciation and amortisation (EBITDA), as a fair exit multiple given its attractive Central London profile and peer group valuations," said the broker then.

But the current deal is expected to go ahead reckons Peel Hunt: "Whilst some shareholders will have hoped for a bigger cash component, the structure of the revised offer would suggest Greene King isn't willing to put significantly more debt into the deal. Given this and the Spirit board's stated position this looks like the best shareholders can hope for."

Of the most recent offer, Langton Capital's Mark Brumby adds: "There is no mention here of any break fee and there are clearly conditional terms. The door, therefore, in theory at least, may be open to a rival bidder such as a PE (private equity) house that wanted the managed units in tandem with a leased and tenanted operator such as Hawthorn.

"However, in practice, it is perhaps likely that this deal will come to fruition. There can be no certainty - and the arbs will get involved and will close the gap between the price of Spirit and the theoretical price of the bid materially - but we believe that this is a deal that will get done," he added.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.l