Analysts Say £2.7B Greene King Deal Is About Discounted Property And Protests, Not Pubs

The property company backed by Hong Kong’s richest man, who made his fortune in real estate, is buying UK pub company Greene King for £2.7B. Unsurprisingly given the background of the buyer, the purchase by Li Ka-Shing’s CK Asset Holdings is as much about property as the great British boozer, analysts said.

“I think we can comfortably expect more pub closures,” markets.com analyst Neil Wilson said. Nearly 1,000 pubs shut last year, according to Altus Group. 

“It's a whopping [price] that implies CKA sees significant value in the property portfolio.”

The 850p a share CK is paying for Greene King is a 50% premium to the company's price of 563p a share before the deal was announced.

Wilson pointed out that Greene King undertook a revaluation of its property portfolio which showed that the open-market value was £4.5B, with the portfolio currently held in the company’s books at £3.6B. With debt CK’s offer values the company at £4.6B. Greene King owns 81% of its 2,700 pubs freehold or on long leaseholds.

Of course, CK is highly unlikely to close all of the pubs Greene King owns and unlock the property value by converting them to other uses, particularly residential — that would be a complicated and expensive business. But analysts expect that to be the strategy with some assets.

“The announcement has helped the pub sector as a whole because it may signal pub closures ahead, which could help the pubs that stay open,” CMC Markets analyst David Madden said.

Other analysts pointed to the current political volatility in CK’s domestic market of Hong Kong as a rationale behind the purchase. Thousands of demonstrators are taking to the streets of the country daily to protest against proposed new regulations that would allow easier extradition of Hong Kong citizens to China.

“The challenges facing the UK property market may be viewed as relatively minor compared to those in the domestic market,” UBS analyst Zachary Gauge said. “The deal appears to demonstrate an appetite to deploy a very large volume of capital into a company with a significant holding of UK real estate, despite the ongoing uncertainty surrounding Brexit.”

Last year CK paid £1B for UBS' London HQ in the City.

In spite of pub closures, investors from the worlds of property and private equity are still buying them up. Pubs have the opportunity for conversion but offer in-place cash flow and yields higher than other asset classes. Other investors to make big plays in the sector include Stonegate, Patron Capital and NewRiver Retail.