In a move reflective of broader economic currents, investment banking giant Morgan Stanley has reportedly entered the bidding fray for approximately 1,000 troubled pubs from the UK’s largest pub operator, Stonegate Group, as reported by The Times of London. This bid comes through the bank’s real estate investment division, aiming to secure a sizeable portion of Stonegate’s distressed pub portfolio amidst the latter’s efforts to pare down its towering debt of nearly £4 billion.
Stonegate Group, with a network of 4,500 pubs across the United Kingdom, is compelled to divest a quarter of its holdings to meet looming financial obligations. With a deadline of July 2025, the group is tasked with either refinancing or repaying half of its debt, a maneuver propelled by a negative ‘B-’ credit rating from Fitch in January. This rating underscores Stonegate’s mid-2025 refinancing risk and highlights its vulnerability to UK consumer spending shifts, which may adversely affect sales despite a diversified brand and operational portfolio.
The bidding contest also features Cerberus Capital Management, a rival suitor for the distressed assets, although representatives from Cerberus and Stonegate remained silent on Fortune’s inquiry regarding the ongoing bid. Morgan Stanley too opted for discretion, declining to comment on the matter.
Brands like Slug and Lettuce, Be At One, and Craft Union fall under Stonegate’s umbrella, yet the group finds itself ensnared in a £3.8 billion debt quagmire. The pressure to either settle more than £2 billion of this debt by 2025 or negotiate potentially unfavourable new terms underscores the financial precipice on which the pub giant teeters.
Amid a persistent decline in the UK pub sector, Stonegate sought to innovate its revenue streams through the adoption of “dynamic pricing” in September, a strategy that saw a modest 20p price uptick per pint during peak hours at about 800 venues. Aimed at offsetting heightened staffing, licensing, and security costs, this pricing adjustment however was met with disdain from both patrons and industry cognoscenti, who foresaw a possible patronage dip during high-demand hours.
The UK pub sector’s slow crumble is corroborated by data from the British Beer and Pub Association (BBPA), revealing a stark 25% decline, or 14,000 fewer pubs, from 2000 to 2022. This downward spiral quickened pace in 2023, with more than two pubs shuttering daily in the first half, largely attributed to soaring energy costs. Altus data cited by The Guardian spotlighted 383 closures in H1 2023, nearly mirroring the 386 closures for the entirety of 2022.
Stonegate, despite the sector’s headwinds, burgeoned its portfolio from a mere 333 pubs in 2010 to about 4,500 at present. The prospective sale of a quarter of its assets could potentially hasten the UK pub sector’s contraction, as the new acquirers, with a keen eye on margins, may opt for repurposing the venues rather than retaining their original pub identity.
The industry also grapples with unprecedented pricing strains amidst post-pandemic supply chain disruptions and geopolitical tensions following Russia’s invasion of Ukraine. BBPA data reveals a 12.5% average price surge per pint between 2020 and 2022, which for Stonegate, translated to a 7% to 8% price elevation across its outlets, as noted by Fitch. Concurrently, the group’s energy costs soared to £70 million in 2023.
In a landscape of dwindling pub fortunes, Morgan Stanley and Cerberus may discern a lucrative opportunity to acquire undervalued UK real estate assets, possibly repurposing them into residential properties. This bid also could signal Morgan Stanley’s strategic shift from office property investments, aligning with its June advisory that forewarned of a gloomier outlook for the commercial real estate sector, reminiscent of the downturn witnessed during the Great Financial Crisis.