16 November 2023
RECOMMENDED ACQUISITION
of
THE CITY PUB GROUP PLC
(“City Pubs”)
by
YOUNG & CO.’S BREWERY, P.L.C.
(“Young’s”)
to be implemented by means of a scheme of arrangement
under Part 26 of the Companies Act 2006
Summary and highlights
· The boards of City Pubs and Young’s are pleased to announce that they have reached agreement on the terms and conditions of a recommended offer pursuant to which Young’s will acquire the entire issued and to be issued ordinary share capital of City Pubs (the “Transaction“). The Transaction is currently intended to be implemented by means of a Court-sanctioned scheme of arrangement under Part 26 of the Companies Act 2006.
· Under the terms of the Transaction, each City Pubs Shareholder will be entitled to receive:
for each City Pubs Share: 108.75 pence in cash (the “Cash Consideration”)
and
0.032658 new Young’s A Shares (the “New Young’s A Shares”)
· Based upon the Closing Price of a Young’s A Share of 1,110 pence on the Last Practicable Date, the Transaction represents a total implied value of 145 pence per City Pubs Share, valuing the entire issued and to be issued ordinary share capital of City Pubs at approximately £162 million.
· The terms of the Transaction represent a premium of approximately:
o 46 per cent. to the Closing Price of 99 pence per City Pubs Share on the Last Practicable Date; and
o 65 per cent. to the volume weighted average Closing Price of 88 pence per City Pubs Share over the 3 months ended on the Last Practicable Date.
· Under the terms of the Transaction, City Pubs Shareholders will, in aggregate, receive approximately 3,612,894 New Young’s A Shares. Immediately following completion of the Transaction, existing Young’s Shareholders will represent approximately 94 per cent. of the Combined Group in terms of economic entitlement (and 90 per cent. of the Combined Group’s voting rights) and City Pubs Shareholders will represent approximately 6 per cent. of the Combined Group in terms of economic entitlement (and 10 per cent. of the Combined Group’s voting rights). Applications will be made to the London Stock Exchange for the New Young’s A Shares to be admitted to trading on AIM.
· If any dividend, distribution and/or other form of capital return is announced, declared, made, paid or becomes payable by City Pubs in respect of the City Pubs Shares on or after the date of this announcement and prior to the Effective Date, Young’s reserves the right to (at the sole discretion of Young’s) reduce the Consideration by the amount of all or part of any such dividend, distribution and/or other form of capital return. If (but only to the extent) Young’s exercises this right or makes such a reduction in respect of a dividend, distribution and/or other form of capital return, City Pubs Shareholders would be entitled to receive and retain the relevant portion of any such dividend, distribution and/or other form of capital return (as applicable), and any reference in this announcement or the Scheme Document (or, in the event that the Transaction is to be implemented by means of an Offer, the Offer Document) to the Consideration will be deemed to be a reference to the Consideration as so reduced.
Recommendation of the City Pubs Directors
· The City Pubs Directors, who have been so advised by Houlihan Lokey and Liberum as to the financial terms of the Transaction, consider the terms of the Transaction to be fair and reasonable. In providing their advice to the City Pubs Directors, Houlihan Lokey and Liberum have each taken into account the commercial assessments of the City Pubs Directors. Houlihan Lokey and Liberum are providing independent financial advice to the City Pubs Directors for the purposes of Rule 3 of the Code.
· Accordingly, the City Pubs Directors intend to recommend unanimously that City Pubs Shareholders vote in favour of the Scheme at the Court Meeting and the Resolutions to be proposed at the General Meeting, as the City Pubs Directors who are interested in City Pubs Shares have irrevocably undertaken to do in respect of their entire beneficial holdings of, in aggregate, 5,260,351 City Pubs Shares representing, in aggregate, approximately 5 per cent. of City Pubs’ total issued ordinary share capital as at the close of business on the Last Practicable Date. In the event that the Transaction is implemented by way of an Offer, the City Pubs Directors intend to recommend unanimously that City Pubs Shareholders accept or procure acceptance of such Offer and to undertake irrevocably to accept or procure acceptance of such Offer in respect of their entire beneficial holdings of City Pubs Shares.
Irrevocable undertakings and Letter of Intent
· In addition to the irrevocable undertakings from the City Pubs Directors described above, Young’s has received:
o irrevocable undertakings to vote in favour (or procure the voting in favour, as applicable) of the Scheme at the Court Meeting and Resolutions to be proposed at the General Meeting (or, in the event that the Transaction is implemented by way of an Offer, to accept or procure the acceptance of such Offer) from Gresham House Asset Management Ltd, Otus Capital Management Limited and Unicorn Asset Management Limited in respect of a total of 20,925,975 City Pubs Shares in aggregate and representing approximately 20 per cent. of City Pubs’ total issued ordinary share capital as at the close of business on the Last Practicable Date; and
o a letter of intent to vote in favour (or procure the voting in favour, as applicable) of the Scheme at the Court Meeting and the Resolutions at the General Meeting (or, in the event that the Transaction is implemented by way of an Offer, to accept or procure the acceptance of such Offer) from Canaccord Genuity Asset Management LTD in respect of a total of 8,421,315 City Pubs Shares in aggregate and representing approximately 8 per cent. of City Pubs’ total issued ordinary share capital as at the close of business on the Last Practicable Date.
· Accordingly, Young’s has received irrevocable undertakings and a letter of intent including those irrevocable undertakings from the City Pubs Directors who own City Pubs Shares, in respect of, in aggregate, 34,607,641 City Pubs Shares representing approximately 33 per cent. of City Pubs’ total issued ordinary share capital as at the close of business on the Last Practicable Date.
· Further details of the irrevocable undertakings and letter of intent, including the terms on which they cease to be binding, are set out in Appendix 3 to this announcement.
Background to and reasons for the Transaction
· Young’s is a leading managed operator of premium pubs and bedrooms across London and the south of England, with a rich 192-year history. It runs a predominantly freehold estate in prime locations, and its pubs sit at the heart of their local communities.
· Young’s has closely followed the City Pubs estate for some time and holds City Pubs’ premium, well-invested and wet-led approach in high regard. Young’s also recognises the skillset, expertise and experience of City Pubs’ employees.
· The Transaction represents a rare opportunity to acquire a high-quality pub and bedroom portfolio of scale, allowing Young’s to increase its managed trading estate by 501 pubs to 279 pubs (an increase of more than 20 per cent.).
______
1 Includes the nine Mosaic Pubs in which City Pubs has a controlling and approximate economic interest of 53 per cent.
· The Transaction will also allow Young’s to substantially increase the number of premium bedrooms within the estate by adding 2402 bedrooms (an increase of more than 25 per cent., taking the total to 1,065 bedrooms).
· The highly complementary nature of the Transaction is expected to allow the Combined Group to take advantage of strategic, operational and financial benefits. In particular:
o Young’s notes City Pubs’ head office costs in the 52-weeks ended 25 December 2022 of £5.6 million and believes it will be able to integrate the two estates, and operate the incremental pubs and bedrooms, with very limited additional overheads;
o the Transaction is expected to generate margin benefits including through purchasing synergies with an approximate gross margin differential of 3 per cent. between Young’s (as at 3 April 2023) and City Pubs (as at 25 December 2022); and
o Young’s believes it will also be able to achieve additional operational synergies at pub level by leveraging its best-in-class operating practices, scale and booking platforms and digital technology, while also enhancing the customer experience.
· City Pubs’ predominantly freehold portfolio of premium, individual and well-invested pubs and bedrooms presents an attractive opportunity for Young’s to drive future growth. Through operational alignment with the broader Young’s estate, Young’s anticipates increased like-for-like food, drink and bedroom sales across the City Pubs estate, while continuing Young’s strategy of consistent year-on-year investment at attractive returns in its pubs and bedrooms.
· The culture of Young’s and City Pubs’ businesses are closely aligned, both championing an entrepreneurial approach, underpinned by strong ambience and customer service and facilitated by supportive and engaging team members. The City Pubs estate therefore closely fits Young’s strategy to operate premium, individual and differentiated pubs and bedrooms. The Young’s Directors recognise the value of City Pubs’ strong customer relationships and trusted teams, as well as the attractive growth opportunities that City Pubs has been pursuing; particularly, the consistent investments made to improve the estate (most notably the addition of nine pubs which operate under the Mosaic name, in which City Pubs has acquired a controlling and approximate economic interest of 53 per cent., and the two recently acquired pubs in London and Oxford). City Pubs’ track record and expertise provides the Young’s Directors with confidence that the Transaction will help deliver on a local, customer-focused strategy for the Combined Group.
· The Transaction therefore represents a significant opportunity to accelerate Young’s existing growth strategy and create value for all stakeholders of the Combined Group.
2 Includes 15 bedrooms from Mosaic Pubs in which City Pubs has a controlling and approximate economic interest of 53 per cent.
· In particular, Young’s notes that the Transaction is expected to be earnings enhancing in the first full year of ownership, retaining a strong balance sheet with a target to return to below 2.5x leverage over the short to medium term (on a pre-IFRS 16 basis).
Background to and reasons for the City Pubs Board’s unanimous recommendation
· Despite the ongoing challenges faced by the pub sector and the broader macroeconomic environment, the City Pubs Board is pleased with City Pubs’ resilient operational and financial progress in recent years and (as set out in the City Pubs Interim Results) the 12.4 per cent. increase in like-for-like sales achieved in the first 38 weeks of the current financial year. The City Pubs Board believes that City Pubs continues to deliver on the strategy set at the time of its 2017 IPO, of growing its estate over time through acquisitions and driving returns through operational excellence. In addition, with its focus on predominantly freehold property and the well-invested nature of its estate, City Pubs has strong asset backing and, with net debt at 25 June 2023 of £5.2 million at a historically low level, the City Pubs Board believes City Pubs has amongst the lowest gearing in the sector.
· As a result, the City Pubs Board is confident that City Pubs is well-positioned to create shareholder value as an independent business over the longer term within an improving UK economy. However, the City Pubs Board would also highlight that as the economy continues to adjust to higher interest rates, and with competition to acquire high-quality premium pubs in the right locations remaining high, it has had to adopt a more measured approach to City Pubs’ expansion than it would ideally have liked. As a result, City Pubs’ head office costs as a percentage of sales are currently high relative to the scale of City Pubs and rising costs and the ongoing imposition of duty and business rates taxes continue to put pressure on margins.
· The City Pubs Board has continually sought ways of creating value and liquidity for City Pubs Shareholders against the backdrop of challenging stock market conditions which, in the City Pubs Board’s opinion, had led to City Pubs Shares being undervalued and provided limited opportunities for City Pubs Shareholders to realise their investment.
· In light of the above, on 5 October 2022, the City Pubs Board commenced a programme to buy back City Pubs Shares, which was extended in September 2023 (the “City Pubs Share Buy-Back Programme“). In aggregate, since the commencement of the City Pubs Share Buy-Back Programme, City Pubs has repurchased a total of 1,920,279 City Pubs Shares at an average price of 84 pence per City Pubs Share, returning approximately £1.6 million to City Pubs Shareholders as at the Last Practicable Date.
· The average daily volume traded in City Pubs Shares during the period from the commencement of the City Pubs Share Buy-Back Programme to the Last Practicable Date was 109,928 City Pubs Shares, including the City Pubs Shares repurchased by City Pubs pursuant to the City Pubs Share Buy-Back Programme. This low level of liquidity has made it challenging for City Pubs Shareholders to monetise their holdings through the market, should they wish to do so. In light of the Transaction, City Pubs is today terminating the City Pubs Share Buy-Back Programme.
· Whilst the City Pubs Board has confidence in its standalone strategy for City Pubs, it is cognisant of the material premium that the Transaction represents against the prevailing risk for small consumer-facing businesses with exposure to macroeconomic uncertainties. The City Pubs Board has, therefore, reached the conclusion that the cash certainty and ongoing exposure to the Combined Group provided by the Transaction, which is the culmination of a number of proposals received from and negotiated with Young’s, provide City Pubs Shareholders with a significant acceleration to potential value creation, reduced operational execution risk and ongoing upside potential which, the City Pubs Board believes, represents an attractive risk-adjusted outcome for City Pubs Shareholders, compared to a continued holding in an independent City Pubs.
· The City Pubs Board highlights that the premium offered by the Transaction terms represents approximately:
o 46 per cent. to the Closing Price of 99 pence per City Pubs Share on the Last Practicable Date; and
o 65 per cent. to the volume weighted average Closing Price of 88 pence per City Pubs Share over the 3 months ended on the Last Practicable Date.
· The City Pubs Board notes that 75 per cent. of the Consideration is payable in cash, which provides City Pubs Shareholders with the near-term opportunity to realise a significant proportion of their otherwise relatively illiquid shareholdings in City Pubs in cash at a material premium, which reflects an attractive multiple.
· The City Pubs Board further notes that 25 per cent. of the Consideration is payable in New Young’s A Shares, which provides City Pubs Shareholders with ongoing participation in the expected success of the Combined Group. Immediately following completion of the Transaction, City Pubs Shareholders will represent approximately 6 per cent. of the Combined Group in terms of economic entitlement (and 10 per cent. of the Combined Group’s voting rights) and will benefit from a more liquid shareholding in a large and well-capitalised group.
· The City Pubs Board acknowledges the strength of the strategic rationale in Young’s acquiring City Pubs (as outlined by Young’s above) and recognises the advantages to City Pubs of being part of a larger, highly complementary and well-regarded group. The City Pubs Board anticipates that the combination of City Pubs and Young’s, a business with a long established and strong culture and an approach City Pubs has long admired, represents a significant opportunity to accelerate Young’s existing growth strategy and create value for all stakeholders of the Combined Group. The City Pubs Board notes that the Transaction is expected by Young’s to be earnings enhancing in the first full year of ownership.
· In summary, the City Pubs Board believes that the Transaction offers an attractive risk-adjusted outcome for City Pubs Shareholders, relative to City Pubs’ prospects as a standalone business.
· In addition to the financial terms of the Transaction, in its evaluation of Young’s as a suitable owner of City Pubs from the perspective of all City Pubs stakeholders, the City Pubs Board has also taken into account Young’s intentions for the business, management and employees and other stakeholders of City Pubs, as set out in this announcement.
· The City Pubs Board is delighted that Young’s places great importance on the depth of skillset, expertise and experience of the employees of City Pubs and recognises that employees of City Pubs will be key to the future success of the Combined Group. Furthermore, the City Pubs Board is also pleased that Young’s has stated that it holds City Pubs’ premium, well-invested and wet-led approach in high regard and considers the Transaction to represent a significant opportunity to accelerate Young’s existing growth strategy and create value for all stakeholders of the Combined Group.
· The City Pubs Board acknowledges that, following the Effective Date, as part of its assessment of potential overhead synergies, Young’s intends to identify areas of overlap of roles currently undertaken by Young’s and City Pubs personnel, and that this is expected to result in a headcount reduction including in certain of City Pubs’ management (including the executive directors of the City Pubs Board), corporate and support functions. The City Pubs Board notes that Young’s does not intend there to be any material reduction in headcount among City Pubs’ highly trained pub and bedrooms teams. Whilst the City Pubs Board regrets the necessity for any headcount reductions, it acknowledges the likely benefits to City Pubs in the next phase of its growth by becoming part of the Combined Group, and anticipates that ongoing City Pubs employees will be able to benefit from potential new opportunities within the Combined Group.
· Accordingly, as described more fully in the full text of this announcement, the City Pubs Directors intend to recommend unanimously that City Pubs Shareholders vote in favour of the Scheme at the Court Meeting and the Resolutions to be proposed at the General Meeting.
Timetable and Conditions
· It is intended that the Transaction will be implemented by means of a Court-sanctioned scheme of arrangement of City Pubs under Part 26 of the Companies Act 2006, further details of which are contained in the full text of this announcement (and full details of which will be included in the Scheme Document). Young’s reserves the right to implement the Transaction by way of an Offer, subject to the Panel’s consent and the terms of the Cooperation Agreement.
· The Transaction is conditional on the approval of the requisite majority of Scheme Shareholders at the Court Meeting and the requisite majority of City Pubs Shareholders at the General Meeting. In order to become Effective, approval of the Scheme must be granted by a majority in number of Scheme Shareholders (or the relevant class or classes thereof) who are present and voting (and who are entitled to vote), either in person or by proxy, at the Court Meeting and at any separate class meeting which may be required by the Court (or, in each case, at any adjournment, postponement or reconvention thereof) representing not less than 75 per cent. in value of the Scheme Shares voted. In addition, in order for the Scheme to become Effective, at the General Meeting, a special resolution implementing the Scheme must be passed by City Pubs Shareholders representing at least 75 per cent. of the votes validly cast at the General Meeting.
· The Transaction will be subject to the other Conditions and terms set out in full in Appendix 1 to this announcement and to the full terms and conditions of the Transaction which will be set out in the Scheme Document.
· It is expected that the Scheme Document containing further information about the Transaction and the notices of the Court Meeting and the General Meeting, together with the accompanying Forms of Proxy, are expected to be published within 28 days of the date of this announcement (unless the Panel agrees otherwise).
· Following the Court Meeting and General Meeting, the Scheme must also be sanctioned by the Court.
· The Transaction is expected to become Effective in Q1 2024, subject to the satisfaction or (where applicable) waiver of the Conditions and certain further terms set out in Appendix 1 to this announcement. An expected timetable of principal events will be included in the Scheme Document.
Comments on the Transaction
· Commenting on this announcement, Simon Dodd the CEO of Young’s said:
“We are excited to be announcing the proposed acquisition of City Pubs, with the full recommendation of their Board. City Pubs is an excellent business we have followed for some time, and one which aligns closely with Young’s in terms of both strategy and culture. Like us, City Pubs operates premium, individual and well-invested pubs and rooms, with a focus on the highest standards of customer service. Both businesses have performed well in a tough trading environment recently, testament to the strength of our business models, people and approach to customers.
We believe that City Pubs is an excellent fit with Young’s and the combination of the two businesses represents a compelling opportunity for all stakeholders. It will allow us to expand our estate through the addition of a complementary, high-quality pub and bedroom portfolio, with the potential for the benefit of significant operational synergies to be realised by both sets of shareholders, through the partial share offer.”
· Commenting on the Transaction, Clive Watson the Executive Chairman of City Pubs said:
“All at City Pubs can feel very proud of what has been built up over the past 12 years. City Pubs was an EIS start-up which began trading in March 2012 and now has an estate of fifty premium pubs in the great cities of Southern England and South Wales. Like all hospitality businesses, the pandemic derailed City Pubs’ progress, but it has been able to produce a strong performance since with a more focussed, reshaped business with the lowest debt in its history and a solid strategy in place.
The City Pubs Board has therefore been able to evaluate today’s recommendation from a position of strength. Mindful of the uncertain economic climate, high interest rates and inflation in particular, and our plans for long term growth as an independent company, initial approaches were rejected. However, following careful consideration, we believe the Transaction is in the best interests of City Pubs shareholders with the ability to realise 75 per cent. of the equity in cash at a material premium to the current share price together with a stake in the future upside. The Board believes the Transaction significantly accelerates the value that could be realised in the short term by City Pubs if it were to remain independent. Additionally, the City Pubs Board is reassured by Young’s similar entrepreneurial culture and its approach to investing in the business.“
This summary should be read in conjunction with, and is subject to, the full text of this announcement (including the Appendices).
The Transaction will be subject to the Conditions and further terms set out in this announcement, including Appendix 1 to this announcement and to the full terms and conditions which will be set out in the Scheme Document. Appendix 2 to this announcement contains the bases of calculations and sources and bases of certain information contained in this summary and this announcement. Appendix 3 to this announcement contains details of irrevocable undertakings and a letter of intent received by Young’s. Appendix 4 to this announcement contains definitions of certain terms used in this summary and this announcement.
Enquiries:
| Young’s | |
| Simon Dodd, Chief Executive Officer Mike Owen, Chief Financial Officer | Tel: +44 (0) 20 8875 7000 |
| J.P. Morgan Cazenove (Sole Financial Adviser, AIM Nominated Adviser and Joint Broker) | |
| James Mitford / Jonty Edwards / Dean Schneider | Tel: +44 (0) 20 3493 8000 |
| Stifel (Joint Broker) | |
| Erik Anderson / Francis North | Tel: +44 (0) 20 7710 7600 |
| MHP Communications (Public Relations Adviser) | |
| Tim Rowntree / Robert Collett-Creedy | Tel: +44 (0) 7736 464 749 |
| City Pubs | |
| Clive Watson, Executive Chairman Holly Elliott, CFO | Tel: +44 (0) 20 7559 5106 |
| Houlihan Lokey (Lead Financial Adviser and Joint Rule 3 Adviser) | |
| Sam Fuller / Tim Richardson / Tom Barnard | Tel: +44 (0) 20 7839 3355 |
| Liberum (Financial Adviser, Joint Rule 3 Adviser, AIM Nominated Adviser and Joint Broker) | |
| Chris Clarke / Mark Harrison / Ed Thomas / Kane Collings | Tel: +44 (0) 20 3100 2000 |
| Panmure Gordon (Joint Broker) | Tel: +44 (0) 20 7886 2500 |
| Simon French / Rupert Dearden / Ailsa Macmaster | |
| Instinctif Partners (Public Relations Adviser) | |
| Matthew Smallwood / Justine Warren | Tel: ++44 (0) 20 7457 2020 |
Slaughter and May are acting as legal adviser to Young’s in connection with the Transaction.
Addleshaw Goddard LLP are acting as legal adviser to City Pubs in connection with the Transaction.
Houlihan Lokey and Liberum are each providing independent advice to City Pubs pursuant to Rule 3 of the Code.