WHEN GLENN PEARSON took on his first full finance director role at Admiral Taverns in July 2007 – having previously served as FD of Littlewoods’ mature catalogue division – it was fitting that he was taking over the finance function at a tenanted pub company. After only three weeks in the job he probably felt in need of a stiff drink.
Pearson remembers being thrown straight into a £760m refinancing deal for 1,755 pubs from Admiral’s estate with Bank of Scotland and Irish Nationwide Building Society as part of a £1bn war chest for further acquisitions and business development.
“I joined three weeks before we did the refinancing. From day one it was 18 hours a day, seven days a week,” Pearson tells Financial Director. “It was a case of being shown a 300-page document and being asked ‘what do you think?’. I had to get up to speed with the business very quickly.”
The funding sorted, Pearson says it was only then that he realised the scale of the task in front of him. The pub company had expanded rapidly since its first transaction in 2004 when it bought 88 pubs for £31m from Whitbread.
A buying spree then followed that bucked the trend of drink-led pubs being sold off by group such as Greene King and Enterprise Inns. By the time Pearson joined, Admiral had more than 2,600 pubs on its books, making it the third-largest tenanted pub owner in the UK.
Such rapid growth hid a gaping hole in the company’s business. The back office was non-existent.
“It was only after we did the refinancing and I went back to the office that I thought, ‘there is nothing here’,” Pearson says.
According to Pearson, the success or failure of a tenanted pubco – which relies on the performance of its individual licencees – is all about the frontline staff and “making sure they have all the information available to make good commercial decisions.”
Back in 2007 this was not the case.
“What became clear to me was that our business managers had no information to work with. They had a weekly volume report and that was it. We were producing loss accounts but we weren’t producing any other management information; we were just flying blind,” he says.
“I started by asking myself how we get better management information out to them. It was then ‘how do we do that?’ because the information wasn’t there.”
Pearson recalls a “slow and painful” six months of getting the business and back office up to speed.
“I started to look around at my team and there wasn’t a team in place to do what I wanted to do. I knew where I wanted to get the business to and had to get the people in place to be able to do it,” he says.
“In that first year we probably didn’t collect 25% of the cash that we invoiced because we didn’t have the people in place to do it. We were releasing beer orders without really having our processes in place so it really was about starting from scratch.”
One of the other obvious problems was there was no management.
“We used to get a bank report once a week but there was no visibility of what it might look like three months out,” Pearson says. “Our credit control process was non-existent.”
Calm before the storm
Having successfully built a back office and finance function that was fit for purpose Pearson could be forgiven for thinking he could look forward to calmer days ahead. Instead, his job was about to become even harder.
Admiral had successfully expanded by acquiring the bottom end of rivals’ estates, selling off the chaff and turning round estates with potential through a mixture of investment and relationship building with the licensees.
The group specialised in financing its multitude of deals as they materialised but when the economic tide turned for the worse in 2009, Admiral was found to have been swimming naked. The company was hugely over-leveraged.
“It took me about 12 to 18 months to get total visibility of where we were,” Pearson says. “Just as we were getting our processes sorted the economy started to crash and it became obvious we were over-leveraged and had to go to banks and tell them we were going to be in default of our covenants.”
Pearson worked with Lloyds to secure a £600m debt-for-equity swap in November 2009. That resulted in the bank taking a 50% stake in the business but slashed the company’s debt to £350m from about £950m.
“We worked with the bank to restructure the business,” says Pearson. “It took an enormous write down, but the business has come out the other side in a much healthier shape.
“It was quite a challenging time; we had the bank’s advisors crawling over the business but they gave it a good health check. It was on a sound footing, it was just over-leveraged.”
Pearson concedes that with debt markets becoming risk averse, the relationship was a difficult one, “but you just have to be mindful of their position. They made no secret that they were not a long-term investor in pubs and at some point they would look to exit.”
A number of pub disposals followed, reducing the pubco’s estate to about 1,480 pubs, helping to reduce net debt to £223m for the year ending May 2011. Yet there are some notable bright points for Admiral.
According to Pearson, the equity relationship with the banks is completely different and is a “lot more forward thinking”, while the company was able to acquire and integrate 189 freehold tenanted pubs previously operated under the Picadilly name and funded by £17.4m on new debt from Lloyds – itself a further endorsement of the group’s strategy and financial performance.
“We have delivered what we said we would,” says Pearson. “The relationship is built on trust and we are creating value.”
The economy is still tight, but with Admiral’s latest results showing income per pub up 4% with an operating profit of £30.6m and the debt position much more manageable, Pearson should finally have some less challenging times ahead.
“Our focus is much more on to how we grow the business. We invested £5m this financial year in expansionary projects and are planning a similar level of investment next year,” he says. “Repayment of bank debt means we are now generating good operational cashflow. We are now able to use that in a much more positive way.” ?