Punch tackles debt with £375m fundraising

Punch Taverns, the debt-laden pub operator, has ended months of speculation by unveiling a £375m fundraising to reduce its debt mountain and meet a critical bond repayment next year, but it warned of continuing tough trading in the sector.

The pub group said that without the firm placing and open offer priced at 100p a share – a 32.7 per cent discount on the closing price of 148.5p on 12 June – it would probably not meet a £275m convertible bond repayment in December 2010. The fundraising dragged Punch's share price down by 44.5p, or 29.97 per cent, to 104p.

The placing by Punch – which has 7,400 leased and tenanted pubs, and 860 managed pubs – follows the deeply discounted £207.5m cash call from its rival pub operator Greene King in April, as pub groups shore up their finances during the downturn in the sector.

While Punch, which has net debts of £4.2bn, will use the bulk of proceeds to pay off its convertible bonds, the group said the funding will also give it flexibility with its ongoing pub disposal programme and will be used to make selective repurchases of other securitisations, providing significant headroom on the covenants.

Giles Thorley, the chief executive of Punch, said: "After we have paid off the convertible bonds, all our debt will be long term. It marks our ability to move beyond the current trading challenging conditions, to focus on fundamentals and continue to drive operational change through the business."

He added: "We have been very careful to right size it and we have tried to be realistic about market conditions and to minimise shareholder dilution."

Mr Thorley said that Punch had been working on the fundraising for about three weeks and described it as "opportunistic", meaning it had been able to test the appetite of shareholders after receiving unsolicited inquiries from them. Punch said its strong cash-flow has enabled it to reduce its gross debt by £404m since the start of its financial year, which represents 8 per cent of the nominal value of the group's debt, at a cost of £258m. It has also raised £171m through the disposal of pubs, including to its rival Greene King.

While the pub group said that expectations for the full year remain unchanged, it said: "We remain very cautious over the near-term due to the lack of forward visibility on trading outlook."

For the 40 weeks to 30 May, Punch's leased pubs division delivered like-for-like earnings before interest, tax, depreciation and amortisation down by 11.2 per cent, a similar level to that for the 28 weeks to 7 March 2009. Punch said that its managed pubs' increased promotional activity had started to improve its performance. The managed division's like-for-like sales were down by 1.2 per cent for the 40 weeks, but rose by 1 per cent in the third quarter.