COLES & AVC LODGE JV FOR SPIRIT FLEET

In Finance by Clyde Mooney

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The long-awaited joint venture between Coles’ Spirit Hotels and KKR’s Australian Venue Company is one step closer, with lodgement of the paperwork this week to Queensland’s Office of Liquor & Gaming Regulation.

Rumours have circled for much of this year that Australian Venue Company (AVC), majority owned by American venture capital behemoth Kohlberg Kravis Roberts (KKR), is looking to strike a massive deal with the Coles-owned Spirit Hotels.

The goal is for the pub group to operate the portfolio of 89 pubs, predominantly across Queensland, as well as Western Australian and South Australia, while Coles retains control of the lucrative $4bn liquor stores business.

Such an arrangement could also serve to free the supermarket giant from its PR woes over operation of gaming machines, although the main impetus for that came from parent company Wesfarmers, which has recently begun moves to divest the $20bn Coles entity.

The greatest hurdle to the arrangement was negotiating Queensland’s liquor laws stipulating that to obtain a liquor licence for a bottleshop, the owner must hold a commercial hotel licence for a pub within 10km. Each licence can have up to four retail premises associated with it.

Further complicating the arrangement, the pub leases are to Coles’ Liquorland Queensland and understood to dictate financial liability by Coles on the lease, even if the operation is on-sold to another party.

What’s more, any solution to this would undoubtedly complicate an inevitable exit strategy by the venture capitalists, and constrain any notions of selling off individual assets, making the huge portfolio a true package deal.

The OLGR website shows the ongoing transfer of assets from sub-companies into Liquorland Queensland, in readiness for assessment of the synthetic joint venture. Sources revealed to PubTIC this assessment is expected to take 12 weeks, meaning no news until at least 2019. OLGR declined to confirm or deny receipt of the JV application at this stage.

But even as the ink is drying on the hard-fought agreement, The Australian reports another breakdown in negotiations, suggesting the QHA objects to the spin-off and has orchestrated discontent amongst key politicians.

The venture’s future will be decided by the regulator, not parliament, and sources report there is no basis to the QHA protesting a deal between two of its own members.

Spirit Hotels shows a book value of around $500 million, making a deal on the pub operations likely to amount to $300-400 million. Coles national liquor operation generates around $120 million EBITDA.

No doubt watching intently is Woolworths, which has a 75 per cent stake in ALH and four times as many pokies machines, bringing its own fresh PR dilemma. A successful deal with AVC could see Coles win a key battle in the supermarket wars.