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Why the acquisition of a UK pub giant may be a Brexit bargain

Andrew Woodman

Greene King's love affair with China goes back to 2015, when President Xi Jinping had his first UK state visit. Then-Prime Minister David Cameron took the Chinese premier to his local pub for a pint, and the beer of choice was Greene King's eponymous IPA.



Press coverage of the event saw sales of Greene King IPA explode in China as the ale earned instant cachet in the world's largest consumer market. Fast forward four years, and CK Asset Holdings—the investment group backed by Hong Kong billionaire

Li Ka-Shing—has agreed to buy the London-listed brewer and pub giant for £2.7 billion (about $3.3 billion), at a healthy 51% premium to its share price on Friday. Including its £1.9 billion debt, the entire acquisition is worth a sobering £4.6 billion. But did CKA score a deal?



There may be a thirst in China for Greene King's export brands, which include Old Speckled Hen and Abbot Ale, but the brewer chiefly operates in an ailing industry. The company currently runs around 2,700 pubs, restaurants and hotels across the UK at a time when the number of establishments licensed to sell alcohol is dwindling at an alarming rate.



A quarterly review of the UK's pub, bar and restaurant sector by

Alix Partners and CGA, shows that as of June 2019, the country had 2,920 fewer licensed premises than a year ago, a decline of about 2.4%. The Campaign for Real Ale, an industry lobby group, says this is chiefly due to pubs suffering a prolonged hangover brought about by rising taxes, which now make up roughly a third of the cost of a pint of ale. This is compounded further by falling foot traffic, as more people drink at home to save money.



Then there is the issue of the UK leaving the EU. As a purely British company, Greene King is heavily exposed to domestic consumer spending. Since the 2016 referendum, its share price has steadily plummeted, reaching its lowest ebb last year. However, news of the deal sent stock prices up more than 50% on Monday.



For CKA, it's a Brexit bargain. Large pub groups are also better insulated from industry headwinds, when compared with small independents, and better placed to grow market share—something CKA is certainly aware of. What is more attractive for the new owners though is Greene King's real estate portfolio.



The company owns or holds a long-term lease on 81% of its properties, with the BBC reporting that a recent revaluation of property portfolio indicated a market value of £4.5 billion against a book value of $3.5 billion. What may be good news for shareholders may not be for pub-goers if CKA decides this property portfolio could be put to better use elsewhere.



CKA is not the only Asian investor to see value in UK brewers. In January, pub operator

Fuller's agreed to sell its brewing business to Japanese drink giant

Asahi for £250 million. The market has also seen some local consolidation. In July,

Stonegate Pubs agreed to buy 

Ei, the UK's largest pub operator, for just under £1.3 billion.  



Featured image courtesy of Greene King