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Pub firms hit by move to curb power over tenants

Published 19/11/2014, 14:51
Updated 19/11/2014, 14:51
© Reuters. A bartender pulls a pint of bitter at the Flying Horse pub in London

© Reuters. A bartender pulls a pint of bitter at the Flying Horse pub in London

By Neil Maidment and William James

LONDON (Reuters) - Pub groups suffered on Wednesday after lawmakers backed a move to hand publicans more control over where they buy beer, hitting shares and raising questions over the structure of the industry.

Shares in Enterprise Inns (L:ETI) and Punch Taverns (L:PUB), owners of more than 9,000 British pubs, tumbled as investors reacted to bill changes announced on Tuesday, which the companies fear could lead to job losses and closures.

Almost half of Britain's 50,000 pubs are run by tenants under traditional "beer-tie" agreements, which mean the publicans buy beer from the firm that holds their lease at above market prices. In return they get subsidised rent or other benefits.

Some publicans have complained such deals can be unfair and offer very low salaries, leading government to unveil reform plans in June. Those plans, which included rent reviews, were sharpened on Tuesday to include an option to allow publicans to buy beer at more competitive prices on the open market.

This was despite government research showing it could lead to pub closures and lost jobs in a sector already hit by a ban on smoking and cheaper alcohol sold in supermarkets.

"This could have material consequences for the tenanted pub sector," analysts at Barclays said. They calculated that a switch of all pubs to rent only options could hit profits at Enterprise and Punch by 19 and 24 percent respectively.

However both firms would likely respond to such changes by cutting support for tenants, selling off pubs or switching others to a group managed format, Barclays said.

Both Enterprise and Punch, whose shares were down 16 and 11 percent respectively, said they were assessing options and awaited the government's response to the change to the bill, aimed at companies with more than 500 tenanted and leased pubs.

"This amendment, which was not supported by the government, threatens to have serious unintended consequences for publicans and the industry at large," said Enterprise Chief Executive Simon Townsend.

TRADITIONAL TIE

The changes will be passed to parliament's upper chamber for debate, although government's chances of gaining enough support to significantly water down the rules are slim due to its weaker influence there. Legal challenges by companies affected are expected, however, analysts said.

The beer-tie originated centuries ago when breweries bought up pubs to make it easier to serve their local markets. Its defenders say it offers people a cheap route into the pub trade.

At Enterprise Inns, which has around 5,500 pubs, only 1-2 percent of licensees ask to opt out of the tie each year. Like rivals, the firm has argued that its agreement ensures big companies invest in pubs to help grow profits.

Greg Mulholland, a lawmaker from the coalition government's junior Liberal Democrat party who proposed the changes that were passed on Tuesday, disagreed.

"It's time that we move forward, that the exploitation of the large companies' licensees becomes a thing of the past, and then we will move to a more sustainable future for thousands of pubs up and down the country," Mulholland told Reuters.

© Reuters. A bartender pulls a pint of bitter at the Flying Horse pub in London

(Editing by Keith Weir)

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