If you work in the pubs business, you have to get used to uncertainty. The underlying business is fairly straightforward – company buys pub, company rents pub to landlord, company sells beer to landlord, company buys more pubs – but nearly 10 years of divestments, mergers and acquisitions mean the industry pint of the ‘usual’ has been replaced by a more fizzy and unpredictable cocktail.
Robert McDonald, FD at Punch Taverns, has worked in the industry for more than 20 years and has seen plenty of change. He joined Allied Domecq in 1982 when the pubs were dominated by big brewers catering for old men who ordered pints of mild, and the occasional port and lemon for the lady. In the late eighties, the beer orders forced brewers out of the pub market. By the nineties, the novelty and theme pub chains took over as a leaner, hungrier breed of venture capital-backed businesses revolutionised the sector.
McDonald spent nearly 17 years at Allied, starting as a project accountant at Tetley until he became FD of Allied Domecq Inns in 1995, working for the company in Liverpool, Scotland and Leeds along the way. ‘Allied was a company you could have a whole career in because you could keep moving and doing different things. And the best jobs were always the finance director jobs because there you’re actually taking part in managing your business.’
McDonald says that he was comfortable in the Allied structure. ‘You don’t stay for 22 years in one industry if you’re really driven by career and ambition,’ he says. It was only when Allied decided to sell off its pubs division to Whitbread in 1999 that he suddenly faced the prospect of losing his job. Fortunately Punch, a small venture capital-backed company under the leadership of entrepreneur Hugh Osmond, burst onto the scene, and after a bloody battle and an Office of Fair Trading referral, Whitbread conceded defeat.
Osmond gave up his interest in Punch after it floated in 2002 – but McDonald still admires the way he shook up the sector. ‘Allied had a policy of selling tenanted pubs because it just didn’t know how to value them. Hugh recognised that if you have a high level of leverage on them, they could support it. So anything you make on top is good growth,’ he says. ‘We looked at the prices he was paying and thought they were huge, but he actually valued them better than anyone else. It was quite ahead of its time.’
McDonald didn’t immediately jump at the chance to join Punch, however. He had been used to the big company mentality. Entrepreneurs (‘who get bored easily’) and venture capitalists (‘who are very analytical’) seemed a risky breed of people to work with.
‘Hugh encouraged me to stay with Punch. He said I could make a lot of money if I joined. I don’t think that has actually come true, but most of what else he said is right,’ he says.
In the past five years, he has gone from being the divisional FD in a large plc to FD of a VC-backed operation. And after the 2002 flotation, he now runs the finances of a company knocking on the doors of the FTSE100.
‘I learned more in the first year at Punch than I had learned in the previous 15 years. Working at Allied was great, but I was finance director in an operating division where we weren’t managing the bottom line and being exposed externally,’ he says. ‘Punch was leaner and meaner. I was immediately involved in merging the original Punch taverns, the Allied pubs and the Inn Business pubs they had also bought.’
During the first year of McDonald’s tenure, Punch had grown from 1,200 pubs to more than 5,000 with the Allied portfolio. With its purchase of Pubmaster in 2003 and InnSpired in 2004, Punch now operates more than 8,000 pubs and is ranked second in the UK behind Enterprise Inns.
In between acquisitions, McDonald has been heavily involved in reorganising the debt structure of the business, consolidating financial systems and organising the flotation of the company. McDonald says the flotation of the business was both the most challenging and rewarding project he has undertaken.
‘Because the business had been through such turmoil and had evolved from different places, different accounting calendars and year-ends, getting three years’ worth of history took some doing,’ he says.
Unfortunately, music group HMV floated and fell flat a week before the Punch IPO was due. The institutions that had lined up to buy Punch stock ran for cover. ‘It took about eight months to get ready for the float, but while we were on our roadshow the market turned down. Suddenly people were trying to drive bargains on our price. We were looking to float between £2.50 and £3.00 and expected to float at about £2.80,’ he says.
When institutions were coming back with offers in the range of £2.30, the VCs, shareholders and management team had to decide whether it was worth floating at all.
The major shareholders, Texas Pacific Group and Hugh Osmond, decided to pull the float after a meeting with Merrill Lynch. ‘We went to the pub behind Merrills, had a few pints and got something to eat. Then I thought, “Hell, we’d better tell people.” I remember writing an email on a paper tablecloth in the restaurant and went back to my hotel and wrote out as a notice to all staff. Instead of waking up to find that we’re floating, staff woke up to find it had all been called off.’
But within days it was back on because Punch had negotiated with what McDonald calls ‘the more sensible institutions’, and the company launched on the market at £2.30.
With all the frenetic activity at Punch, McDonald’s main problem has been communication and selling the story to the City. But because the pub business is based on investment in bricks and mortar, and Punch only employs 500 people, the business model itself isn’t difficult to communicate.
‘The business is resilient. Like-for-like turnover growth for 2003 was 2.9%; the year before it was 2.6%, and the year before that it was 3%. The complexity is that the business keeps evolving, and so does the way that it is funded.’
Punch has also found itself talking more with the government, especially since the launch of a DTI investigation looking into how pub owners such as Punch force landlords to buy beer from them as part of their lease agreement. The looming threat of a smoking ban in UK pubs is another financial risk that McDonald is addressing, but he isn’t that bothered – it’s just another part of his job.
‘There is a trend towards more no smoking areas and better amenities for non-smokers, but we need to work with government to make sure it is aware of that. The government doesn’t need to legislate. There’s a bit of political lobbying going on.’
While its venture capital history is firmly behind it, Punch’s entrepreneurial spirit is still in evidence through its thirtysomething chief executive Giles Thorley. Even McDonald admits he has stopped wearing a suit and tie in the office, although it did take some time. But a focus on what’s what financially is evident in Punch’s board make-up. Chairman Phil Cox is former finance director of Asda, and the chair of its audit committee Peter Cawdron was strategy director of Grand Metropolitan and FD of a US advertising business. But McDonald doesn’t feel that working with other FDs encroaches on his job.
‘You wouldn’t believe Phil was a former finance director,’ McDonald says. ‘He doesn’t pester me in the way FDs sometimes do.’
McDonald is left to do the day job – financial management and accounting, driving acquisitions, responsibility for IT and systems, communicating with investors and the City. But with all this experience, shouldn’t he be a chief exec by now? ‘I wouldn’t mind doing a chief exec’s role, but I’m not spending my time looking for one. I’m not particularly driven by ambition,’ he says. ‘It matters to me that I do my job well. It matters a lot to me for Punch to be a successful company.’
This is an edited extract of a profile that appears in the November issue of our sister magazine Financial Director CV
2002: FD, Punch Taverns
2000-02: FD, Punch Pub Company
1999-02: FD, Punch Taverns & Vanguard
1995-99: FD, Allied Domecq Inns
1982-95: Various financial positions, Allied Domecq
1977-82: Management accountant, United Glass.