In Finance by Clyde Mooney

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The much-rumoured joint venture between Coles’ pub arm and a big operator is close to a deal with KKR’s Australian Venue Company, with the major hurdle fast approaching.

Speculation has emerged about a broad change to the fleet of Spirit Hotels, sparked by Coles’ and parent company Wesfarmers’ continued unrest with exposure to poker machines, yet unwillingness to part with their lucrative off-premise business, supplying 18.6 per cent of the Australian market.

The disconnect has seen Spirit’s geographic spread distorted, the group exiting NSW and Victoria, now counting just a half-dozen pubs in both South Australia and non-gaming Western Australia, and the vast majority in Queensland, stymied by the State’s historic law requiring all bottleshops be linked to a hotel.

Complicating the task of forming an operations partnership with another entity is that most of the Coles pub leases hold the company financially responsible for payment on the lease, even if the business had been sold to another party.

Dixon Group’s dramatic rise to prominence paved the way for pursuit by global investment force Kohlberg Kravis Roberts (KKR). Australian Venue Company (AVC) was created following KKR’s 80 per cent buy-in, for around $190 million.

Since AVC’s inception, the American backers have built on the portfolio through acquisitions, to a total value of circa $500 million.

Sources say KKR’s buy into the Coles partnership will approach another $300 million, adding to its collection Spirit’s 88 pubs, the majority being leaseholds. This would go a long way to reaching the investor’s goal of a $1bn entity to take to the proposed IPO, which it recently confirmed was ‘on hold’.

The finer points of a deal are being negotiated between lawyers for the two parties, and stakeholders are expecting to meet with the various regulators in the next fortnight. AVC CEO Paul Waterson will reportedly oversee the pubs entity, and former Spotless boss Bruce Dixon remain chairman.

Whatever arrangement and partnership split is agreed between the major players, the biggest hurdle will undoubtedly be getting approval from Queensland’s Liquor & Gaming for transfer of scores of hotel and EGM licences.

And regardless of what emerges, it remains to be seen if Coles will succeed in appeasing the mud-throwers pillorying it, who show no mercy for Woolworths over its 75 per cent stake in ALH.