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Punch Taverns PLC (PUB)

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Monday 15 June, 2009

Punch Taverns PLC

Statement re Capital Raise

RNS Number : 8722T
Punch Taverns PLC
15 June 2009
 



THIS ANNOUNCEMENT AND THE INFORMATION CONTAINED IN IT IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART IN OR INTO THE UNITED STATES, AUSTRALIA, CANADA, NEW ZEALAND OR SWITZERLAND AND SHOULD NOT BE DISTRIBUTED IN, FORWARDED TO OR TRANSMITTED INTO THOSE COUNTRIES OR INTO ANY OTHER JURISDICTION WHERE TO DO SO MIGHT CONSTITUTE A VIOLATION OF LOCAL SECURITIES LAWS OR REGULATIONS. PLEASE SEE THE IMPORTANT NOTICE AT THE END OF THE SUMMARY.

15 June 2009

PUNCH TAVERNS PLC

OVERVIEW

The board of Punch Taverns plc ('Punch' or the 'Company') today announces:

·         an intention to raise approximately £350 million by means of a Firm Placing and a Placing and Open Offer of New Ordinary Shares;
·          an intention to make a tender offer to purchase any or all of its outstanding Convertible Bonds;
·          the Company’s trading results for the 40 weeks to 30 May 2009; and
·          initial views on the Business and Enterprise Select Committee’s 13 May 2009 report into Pubcos.

Speaking of the announcements today, Giles Thorley, Punch Taverns' Chief Executive said:

 'Today's announcements are a clear sign to the market, our partners, our customers and our employees of Punch's ability and determination to move beyond the current challenging market conditions, to focus on fundamentals and continue to drive operational change through the business to deliver long term shareholder value. We are grateful to our shareholders for the support that they have shown.'

Punch will be hosting a conference call for analysts and institutional investors today at 8.30 a.m. The details of the conference call are as follows:


Time:

8.30 a.m.

Dial-in Number:

+44 (0) 20 7138 0828

Conference Code:

7184056


A presentation will also be available on the Company's website, www.punchtaverns.com

INTENTION TO RAISE APPROXIMATELY £350 MILLION VIA THE ISSUE OF NEW ORDINARY SHARES

The board of Punch today announces its intention to raise approximately £350 million by means of a Firm Placing and a Placing and Open Offer of New Ordinary SharesThe New Ordinary Shares will be issued at the Offer Price determined by a market book build process which commences immediately and is expected to close no later than 4.30 p.mtoday. The Joint Bookrunners reserve the right to close the book build process earlier if appropriate.

It is intended that the Firm Placing and the Placing and Open Offer will comprise:

Ÿ         50 per cent. firm offer of New Ordinary Shares at the Offer Price to Firm Placees; and
Ÿ         50 per cent. of New Ordinary Shares placed with placees at the Offer Price, subject to clawback by existing Shareholders, at the Offer Price, through the Open Offer.

The Firm Placing and the Placing and Open Offer are subject to approval by Shareholders at a General Meeting to be held in early July. A Prospectus will be sent to all Qualifying Shareholders (other than Excluded Shareholders) shortly.

Goldman Sachs International and Merrill Lynch International are acting as Joint Sponsors and Joint Bookrunners in respect of the Firm Placing and the Placing and Open Offer.

BACKGROUND AND REASONS 

Since its flotation in 2002, Punch's business model has been developed with a view to maximising long-term value for Shareholders by actively managing the composition of its estate. This has resulted in Punch developing a diversified and high-quality pub portfolio.  

The Board has also sought to maximise returns to Shareholders by maintaining a debt structure with long-term financing consisting principally of listed securitisation notes. As at 30 May 2009, the Group had approximately £4.2 billion of listed notes in issue secured over more than 7,900 of the Group's pubs under three separate securitisations: the Punch A Securitisation, the Punch B Securitisation and the Spirit Debenture.

In addition, to fund the acquisition of the Spirit Group in 2006, a subsidiary of the Company issued £275 million in principal amount of Convertible Bonds. These are due to mature in December 2010.

While the Board remains confident about the longer term prospects for Punch and for the industry as a whole, it remains cautious about the prospects of any significant improvement in trading in the near term.

Punch expects that its securitisations will continue to satisfy the key debt service cover ratio (''DSCR'') financial covenants under the securitisations throughout the current and the next financial year. Punch also expects that the Punch A Securitisation and the Punch B Securitisation will continue to satisfy the performance tests for payments outside of their respective securitisations throughout the current financial year. This will assist the Group in funding the repayment of the Convertible Bonds at or prior to their maturity. Punch does not expect that such performance tests will continue to be met in the next financial year but Punch does not expect this to affect the Group's ability to reduce debt levels within the respective securitisations in line with the Board's plans.

Given the difficult trading environment, Punch's key objectives have been to increase cash flow and reduce debt levels to allow the Group to repay the Convertible Bonds at or prior to their maturity on 14 December 2010 and to repurchase securitisation notes at a discount to par, which in turn assists in providing covenant headroom under the securitisations. The Board has taken significant action since early 2008 towards achieving these objectives, including:

·         suspension of material pub acquisition activity;
·         suspension of dividend payments;
·         implementation of a cost reduction programme;
·         repurchase of £334.3 million (in the 40 weeks of the current financial year to 30 May 2009) in nominal amount of securitisation notes at a cost of £205.7 million to increase headroom under the applicable DSCR financial covenants; and
·         acceleration of the Group’s ongoing disposal programme, focusing on the disposal of less sustainable and less profitable pubs, as well as certain strategic disposals.

However, given the challenging economic conditions which Punch continues to face and the uncertainty surrounding forecast revenue, cash flows, disposal activity and the ability of the Group to repurchase debt at a discount to par, it is possible that the Group will not be able to make sufficient payments outside the Punch A and Punch B Securitisations or generate sufficient cash outside the securitisations to allow the Company to repay the Convertible Bonds in full on maturity (December 2010).

As such, the Board strongly believes that the Firm Placing and the Placing and Open Offer represent an attractive alternative for facilitating repayment of the Convertible Bonds and providing funds for the repurchase of securitisation notes at a discount to par (if appropriate opportunities arise) which in turn will assist the Group in providing covenant headroom under the securitisations.

In addition, the Firm Placing and the Placing and Open Offer: 

·         will afford the Group flexibility for, amongst other things, its ongoing disposal programme;
·         will allow management to focus more on medium and long-term value creation without immediate concerns in respect of short-term debt management; and
·         in the view of the Board, are an attractive alternative to disposing of core pubs at prices that would not be in the best interests of Shareholders in the longer term, and will enhance Shareholder value and strengthen the Company’s balance sheet and overall financial position.

CONVERTIBLE BOND TENDER

The Board also announces today its intention to make a tender offer to purchase any or all of the outstanding Convertible Bonds. The Convertible Bond Tender will invite Bondholders to offer any or all of the outstanding Convertible Bonds which they hold for purchase by the Group at a price of not less than 95 per cent. (as a percentage of the nominal principal amount outstanding of the Convertible Bonds). Subject to the condition that the Firm Placing and the Placing and Open Offer complete (a condition waivable by Punch in its discretion), the Group intends to purchase all of the Convertible Bonds offered pursuant to the Convertible Bond Tender.

USE OF PROCEEDS

The Board proposes to use a portion of the net proceeds of the Firm Placing and Placing and Open Offer to fund the purchase of any Convertible Bonds offered pursuant to the Convertible Bond Tender. The Board will consider repurchasing any remaining Convertible Bonds as and when appropriate opportunities arise or will redeem them on maturity.  

It is intended that the balance of the net proceeds will be used for the Group's general corporate purposes, including selective repurchases of securitisation notes (at a discount to par, where possible), as and when appropriate opportunities arise, which in turn will assist the Group in providing covenant headroom under the securitisations.

CURRENT TRADING AND PROSPECTS

The Group today released its Interim Management Statement for the 40 weeks from the start of the financial year on 24 August 2008 to 30 May 2009. In that announcement, the Company made the following statements about the Group's current trading and prospects:

'Trading results to date reflect the challenging market conditions being faced by the sector. The wider recessionary economic conditions have significantly reduced consumer confidence and impacted the level of disposable income being made available for leisure activities. 

Although we anticipate that demand levels are unlikely to improve in the near term, we are on track to meet our expectations for the financial year. Trading performance in the third quarter of the financial year shows early indication that our actions to stabilise performance are seeing some success. Improved trading during March and April benefited from softer comparatives, principally due to a later Easter this year and a poor, early Easter last year. Trading during May has been more mixed given tougher, weather driven comparatives a year ago.'

'While we are confident of the longer term prospects for the Group and our expectations for the full year remain unchanged, we remain very cautious over the near-term due to the lack of forward visibility on trading outlook.'

BUSINESS AND ENTERPRISE SELECT COMMITTEE REPORT

The House of Commons Business and Enterprise Select Committee ('BESC') published its report on pub companies on 13 May 2009. The inquiry was established to review progress since a previous report on pub companies by the House of Commons Trade and Industry Select Committee ('TISC') in 2004. BESC recommended that:

·         the Secretary of State urgently refer the sector to the Competition Commission (“CC”) for a market investigation;
·         pub companies offer lessees, on a phased basis, a choice between a free-of-tie lease and a tied lease;
·         there be improved transparency in the rent assessment process;
·         the renting of leisure machines should no longer be on a tied basis; and
·         there should be a ban on pub companies imposing restrictive covenants when selling individual pub properties preventing their further use as a pub.

It remains to be seen how the Secretary of State will respond to the BESC recommendation and what form any further investigation by either the Office of Fair Trading ('OFT') or the CC will take. However, the Company takes comfort from the fact that the European and UK competition authorities have investigated pub tie arrangements several times and concluded that they are not anti-competitive where they incorporate a policy of multi-sourcing and periodic tendering (as the Company's do). Moreover the OFT's written evidence to BESC noted that it had received no evidence or complaints that led it to alter its previous position (when responding to the TISC in 2004) that there is no significant competition problem in relation to the beer and pub market. The Company believes that, should the Government (or the OFT) decide to refer the matter to the CC on this occasion, the outcome will not lead to a prohibition of the beer tie.

The Company recognises however that there are a number of issues facing the pub industry at present and whilst these cannot be attributed exclusively to the pub company model, it is in the Company's own and its lessees' interests to address the issues that have been raised by BESC. Indeed, the Association of Licensed Multiple Retailers ('ALMR') wrote to the Chairman of the BESC on 10 June, noting that it was working with a number of industry stakeholders (including the Company) to address the issues raised by BESC, by negotiating changes in industry practice through a formal mediation process with the intention of introducing legally binding changes in the relationship between pub companies and their lessees. AMLR hopes to reach a resolution within six months.

In the Company's response to BESC it will be:

·         supporting the creation of an independent process for accrediting improved transparency in rent assessments, including supporting the plans of the British Institute of Innkeeping to introduce a low cost arbitration plan for determining rents;
·         confirming the Company’s commitment set out in a letter of 11 December 2008 to BESC offering lessees the opportunity to buy their pub from the Company (as at 5 June 2009 around 300 of the Company’s lessees have either exchanged, completed or are at some stage of the legal sale process for the purchase of their pub);
·         explaining how the leisure machine tie optimises machine returns. The Company will however review the division of machine income and will remove the lessee’s machine share from rent calculations in future rent reviews;
·         confirming the Company’s commitment to fair insurance contracts – if lessees can better the price of insurance for comparable cover that the Company is able to procure, we will reimburse the difference; and
·         confirming the Company’s commitment to cease imposing restrictive covenants on future sales of individual properties.

 


For further information, please contact:


Punch Taverns plc

Giles Thorley, Chief Executive

Phil Dutton, Finance Director

Today: +44 (0) 20 7360 4900

Thereafter: +44 (0) 20 7255 4002

Smithfield Consultants

John Kiely

Alex Simmons

+44 (0) 20 7360 4900

Goldman Sachs International 
(Joint Sponsor and Joint Bookrunner)

Anthony Gutman

Nick Harper

Jim Wight


+44 (0) 20 7774 1000


Merrill Lynch International 
(Joint Sponsor and Joint Bookrunner)

Simon Mackenzie-Smith

Andrew Osborne

Rupert Hume-Kendall

+44 (0) 20 7628 1000



  IMPORTANT NOTICE

This announcement is not a prospectus. Investors should not subscribe for or purchase, sell or dispose of any New Ordinary Shares referred to in this announcement except on the basis of information in the Prospectus to be published by or on behalf of Punch Taverns plc in connection with the proposed Firm Placing and the Placing and Open Offer.

This announcement is for information purposes only and does not constitute or form part of any offer or invitation to purchase, otherwise acquire or subscribe for, sell or otherwise dispose of or issue, or any solicitation of any offer to purchase, otherwise acquire or subscribe for, sell or otherwise dispose of or issue New Ordinary Shares or to take up any entitlements to New Ordinary Shares in any jurisdiction in which such an offer or solicitation is unlawful.

This announcement and the information contained in it is not for distribution (directly or indirectly) in or to the United StatesCanadaAustraliaNew Zealand or Switzerland. It does not constitute an offer for sale of securities, nor a solicitation to purchase or subscribe for or otherwise acquire securities, in the United StatesCanadaAustraliaNew Zealand or Switzerland or any other jurisdiction where such offer, sale or solicitation would be unlawful.

A copy of the Prospectus when published will be available on the Company's website at www.punchtaverns.com provided that the Prospectus will not be available (whether through the website or otherwise) to Shareholders in Excluded Territories and, subject to certain exceptions, the United States. The Prospectus will give further details of the Firm Placing and the Placing and Open Offer.

Goldman Sachs International, which is authorised and regulated in the United Kingdom by the Financial Services Authority, is acting as joint sponsor and joint bookrunner for Punch Taverns plc and no one else in connection with the Firm Placing and the Placing and Open Offer and will not be responsible to anyone other than Punch Taverns plc for providing the protections afforded to its clients or for providing advice in relation to the Firm Placing and the Placing and Open Offer or any matters referred to in this announcement.

Merrill Lynch International, which is authorised and regulated in the United Kingdom by the Financial Services Authority, is acting as joint sponsor and joint bookrunner for Punch Taverns plc and no one else in connection with the Firm Placing and the Placing and Open Offer and will not be responsible to anyone other than Punch Taverns plc for providing the protections afforded to its clients or for providing advice in relation to the Firm Placing and the Placing and Open Offer or any matters referred to in this announcement.

The New Ordinary Shares and the Open Offer Entitlements have not been and will not be registered under the US Securities Act, or under the securities laws of any state or other jurisdiction of the United States and may not be offered, sold, taken up, exercised, resold, renounced, transferred or delivered, directly or indirectly except pursuant to an applicable exemption from, or in a transaction not subject to, the registration requirements of the US Securities Act and in compliance with any applicable securities laws of any state or other jurisdiction of the United States. There will be no public offering of the New Ordinary Shares in the United States. The New Ordinary Shares offered outside the United States are being offered in reliance on Regulation S under the US Securities Act. 

The New Ordinary Shares have not been and will not be registered under the securities laws of any Excluded Territory and may not be offered, sold, taken up, exercised, resold, transferred or delivered, directly or indirectly, within the Excluded Territories except pursuant to an applicable exemption from registration and in compliance with any applicable securities laws. There will be no public offer of the New Ordinary Shares in any of the Excluded Territories.

Note regarding forward-looking statements

This document contains 'forward-looking statements' that involve risks and uncertainties. Forward-looking statements can be identified by words such as 'believes', 'estimates', 'anticipates', 'expects', 'intends', 'may', 'would', 'should', 'will', 'plans', 'predicts' and 'potential', as well as the negatives of these terms and other words of similar meaning in connection with a discussion of future operating or financial performance. These may include, among others, statements relating to:

·         the intentions, beliefs or current expectations of the Group and/or the Directors concerning the Group’s plans or objectives for future operations, products, financial performance and results of operations,
·         liquidity, prospects and dividend policy;
·         the impact of an economic downturn or growth in particular regions;
·         the Group’s operations and ability to achieve cost savings;
·         anticipated uses of cash; and
·         the expected outcome of contingencies, including regulatory changes, the outcome of regulatory investigations, litigation and pension liabilities.

The forward-looking statements in this document are made based upon the Company's expectations and beliefs concerning future events impacting the Group and therefore involve a number of known and unknown risks and uncertainties. Such forward-looking statements are based on numerous assumptions regarding the Group's present and future business strategies and the environment in which it will operate, which may prove not to be accurate. The Company cautions that these forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in these forward-looking statements, therefore undue reliance should not be placed on such forward looking statements.

Important factors that could cause the actual results of operations or the financial condition of the Group to differ materially from those expressed or implied by forward-looking statements in this announcement include, but are not limited to:

·                      changes or differences in UK or international economic, financing or political conditions, in particular those affecting the leisure industry in the United Kingdom;
·                      changes within the leisure industry sector;
·                      general competitive pressures;
·                      interest rate fluctuations; and
·                      the impact of existing and future regulation and legislation.

The above list should not be construed as exhaustive and undue reliance should not be placed on forward-looking statements.

Any forward-looking statements contained in this announcement speak only as at the date hereof. Except as required by the Listing Rules, the Disclosure and Transparency Rules, the Prospectus Rules, the London Stock Exchange or other applicable law or regulations, the Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this document might not occur and actual results may differ materially from those described in the forward-looking statements.

The information contained in this announcement is being provided in connection with the proposed Firm Placing and the Placing and Open Offer and not for any other purpose.


 

PUNCH TAVERNS PLC

PROPOSED Firm Placing and Placing and Open Offer

INTRODUCTION

The Board announces today that Punch proposes, subject to approval by Shareholders, to raise approximately £350 million by way of the Firm Placing and the Placing and Open Offer. Confirmation of whether the Firm Placing and the Placing and Open Offer are to proceed, the number of the New Ordinary Shares to be issued and the Offer Price for such New Ordinary Shares will follow a market book build process which commences immediately and will close no later than 4.30 p.m. today. The Joint Bookrunners reserve the right to close the book build process earlier if appropriate. An announcement will be made as soon as practicable after the close of the book build process.

The Board also announces its intention to make a tender offer to purchase any or all of the outstanding Convertible Bonds at a price of not less than 95 per cent. (as a percentage of the nominal principal amount outstanding of the Convertible Bonds). 

STRUCTURE OF THE Firm Placing and the Placing and Open Offer

Structure

Punch is proposing to raise approximately £350 million by way of the Firm Placing and the Placing and Open Offer. It is intended that the Firm Placing and Placing and Open Offer will comprise:

Ÿ         50 per cent. firm offer of New Ordinary Shares at the Offer Price to Firm Placees; and
Ÿ         50 per cent. of New Ordinary Shares placed with placees at the Offer Price, subject to clawback by existing Shareholders, at the Offer Price, through the Open Offer.


The Firm Placing and the Placing and Open Offer are conditional upon, amongst other things, Shareholder approval which will be sought at the General Meeting to be held in early July 2009. A Prospectus will be sent to Qualifying Shareholders (other than Excluded Shareholders) shortly.

The New Ordinary Shares to be issued under the Firm Placing and the Placing and Open Offer will, when issued and fully paid, rank pari passu, in all respects with the Existing Ordinary Shares.  

An application will be made to the UK Listing Authority for the New Ordinary Shares (to be issued under the Firm Placing and the Placing and Open Offer) to be admitted to the Official List and an application will be made to the London Stock Exchange for the New Ordinary Shares (to be issued under the Firm Placing and the Placing and Open Offer) to be admitted to trading on the London Stock Exchange's main market for listed securities. It is expected that Admission will become effective and that dealings in the New Ordinary Shares will commence on the London Stock Exchange at 8.00 a.m. on the first Business Day following the General Meeting.

The Firm Placing

The Firm Placing Shares will not be subject to clawback and do not form part of the Open Offer. The Firm Placing is conditional upon, amongst other things:

·         the passing of the Share Issue Resolutions at the General Meeting;
·         Admission becoming effective by not later than 8:00 a.m. on the fifteenth Business Day following the publication of the Prospectus; and
·         the Underwriting Agreement having become unconditional in all respects and not having been terminated in accordance with its terms prior to Admission.

Assuming that Shareholders approve the Firm Placing and the Placing and Open Offer at the General Meeting, it is intended that the Firm Placing Shares will be issued on the first Business Day following the General Meeting.  

Details of further terms and conditions of the Firm Placing are appended to this announcement.

The Placing and Open Offer

The Open Offer Shares will be placed with Conditional Placees at the Offer Price, subject to clawback in respect of valid applications by Qualifying Shareholders under the Open Offer. 

Qualifying Shareholders (other than Excluded Shareholders) will be invited to apply to acquire the Open Offer Shares at the Offer Price, pro rata to their holdings of Existing Ordinary Shares on the Ex-Entitlements Date, on a basis to be determined after the market book build process. 


The Placing and Open Offer is conditional, inter alia, on:

·                     the Share Issue Resolutions being passed at the General Meeting;
·                     Admission becoming effective by not later than 8:00 a.m. on the fifteenth Business Day following the publication of the Prospectus; and
·                     the Underwriting Agreement becoming unconditional in all respects and not having been terminated in accordance with its terms prior to Admission.

Details of further terms and conditions of the Open Offer, including the procedure for acceptance and payment, will be set out in the Prospectus which will shortly be sent to all Qualifying Shareholders (other than Excluded Shareholders).

Overseas Shareholders should refer to the Prospectus, when published, for information on their ability to participate in the Open Offer.

Underwriting

Punch, Goldman Sachs International and Merrill Lynch International have today entered into the Underwriting Agreement. The obligations of Goldman Sachs International and Merrill Lynch International under the Underwriting Agreement are conditional upon, amongst other things, the execution by each of the parties of a pricing supplement following the satisfactory close of the book build process. Subject to the Underwriting Agreement becoming unconditional in all respects and not having been terminated in accordance with its terms prior to Admission, Goldman Sachs International and Merrill Lynch International will be obliged to underwrite the acquisition of all the New Ordinary Shares the subject of the Firm Placing and the Placing and Open Offer.

BACKGROUND TO AND REASONS FOR THE FIRM PLACING AND THE PLACING AND OPEN OFFER

Since it was admitted to trading on the London Stock Exchange's main market for listed securities in 2002, Punch's business model has been developed with a view to maximising long-term value for Shareholders. Punch has grown both organically and through major acquisitions of leased and tenanted and managed pub businesses, such as the acquisition of the Pubmaster estate in 2003 and the Spirit Group estate in 2006. Punch has actively managed the composition of its estate since its flotation by pursuing a strategy of acquiring high-quality pubs and disposing of less sustainable and less profitable pubs. This has resulted in Punch developing a diversified and high quality pub portfolio.  

Since flotation, the Board has sought to maximise returns to Shareholders by maintaining a debt structure with long-term financing, consisting principally of listed notes secured on its sizeable property portfolio. This remains the case today, with approximately £4.23 billion of listed notes in issue as at 30 May 2009, secured over more than 7,900 of the Group's pubs, which had a book value in excess of £6 billion as at 23 August 2008. The notes are issued under three separate securitisations, the Punch A Securitisation, the Punch B Securitisation and the Spirit Debenture. In addition, at the time that Punch acquired the Spirit Group in 2006, a subsidiary of the Company issued £275 million in principal amount of Convertible Bonds (maturing in December 2010) to fund part of the acquisition costs (the Convertible Bonds are guaranteed by Punch). As at 30 May 2009, £215 million in principal value (including accreted redemption premium payable on final maturity) remained outstanding under the Convertible Bonds.  

The Group is subject to certain covenants and performance tests under its securitisations. The key financial covenant is the debt service cover ratio (''DSCR'') which needs to be met in order to avoid an event of default under the terms of the securitisations. In addition, one of the key performance tests under the securitisations restricts the ability of cash generated by the operating companies within a securitisation to be paid or distributed to members of the Group (including the Company) outside of that securitisation unless, among other things, the DSCR is above a prescribed minimum. Despite the current challenging market conditions, the Group has maintained headroom under the DSCR financial covenants, with headroom of 23 per cent., 28 per cent. and 32 per cent. under the Punch A Securitisation, the Punch B Securitisation and the Spirit Debenture, respectively, as at 7 March 2009 (the last testing date). Further, at present both the Punch A Securitisation and the Punch B Securitisation satisfy the performance tests for payments outside of their respective securitisations. The Spirit Debenture does not currently satisfy all of the performance tests for such payments and is therefore not entitled to make payments to members of the Group outside of the securitisation (subject to certain limited exceptions) until it does meet those performance tests. 

Notwithstanding the Group's current position, the UK pub sector continues to face challenging market conditions and while the Board remains confident about the longer term prospects for Punch and for the industry as a whole, the Board remains cautious about the prospects of any significant improvement in trading in the near term. Wider recessionary economic conditions have significantly reduced consumer confidence and had an adverse impact on the level of disposable income available for leisure activities. In addition, the sector has experienced a number of specific challenges, including the continued decline in the level of beer consumption, the ongoing effects of the smoking ban, increased competition from off-licences and supermarkets, increased duty on alcohol, inflation in the cost of food and increased regulation.

Punch expects that its securitisations will continue to satisfy the DSCR financial covenants throughout the current and the next financial year. Punch also expects that the Punch A Securitisation and the Punch B Securitisation will continue to satisfy the performance tests for payments outside of their respective securitisations throughout the current financial year; this will assist the Group in funding the repayment of the Convertible Bonds at or prior to their maturity. Punch does not expect that such performance tests will continue to be met in the next financial year, but Punch does not expect this to affect the Group's ability to reduce debt levels within the respective securitisations in line with the Board's plans which are described more fully in the paragraph below.

Given the difficult trading environment, Punch's key objectives have been to increase cash flow and reduce debt levels to allow the Group to repay the Convertible Bonds at or prior to their maturity on 14 December 2010 and to repurchase securitisation notes at a discount to par, (which in turn will assist in providing covenant headroom under the securitisations). The Board has taken significant action since early 2008 towards achieving these objectives, including: 

·         a suspension of material pub acquisition activity since early in the 2008 financial year;
·         reviewing the Company’s dividend policy and suspending payment of dividends;
·         implementing a cost reduction programme involving reducing central office costs and refocusing capital expenditure programmes; and
·         repurchasing £334.3 million (in the 40 weeks of the current financial year to 30 May 2009) in nominal amount of securitisation notes at a cost of £205.7 million, to increase headroom under the applicable DSCR financial covenants.

In addition, the Board has undertaken a thorough review of the Group's estate and has accelerated its ongoing programme focusing on the disposal of less sustainable and less profitable pubs. The Group has also made certain strategic disposals. As a result, as at 30 May 2009, a total of 311 pubs had been sold since the beginning of the 2009 financial year, raising proceeds together with other assets of £171 million. Since then the Group has also agreed to sell 11 managed pubs to Greene King for a total consideration of £30.4 million. This sale is expected to complete on 1 July 2009.

Despite all of these actions given the challenging economic conditions which Punch continues to face and the uncertainty surrounding forecast revenue, cash flows, disposal activity and the ability of the Group to repurchase debt at a discount to par, it is possible that the Group will not be able to make sufficient payments outside the Punch A and the Punch B Securitisations or generate sufficient cash outside the securitisations to allow the Company to repay the Convertible Bonds in full on maturity in December 2010. As such, the Board strongly believes that the Firm Placing and the Placing and Open Offer represent an attractive alternative for facilitating repayment of the Convertible Bonds and providing funds to allow the repurchase of securitisation notes at a discount to par (if appropriate opportunities arise) in accordance with the Board's objectives, which in turn will assist the Group in providing further covenant headroom under the securitisations. The Firm Placing and the Placing and Open Offer will also afford the Group flexibility in relation to, amongst other things, its ongoing disposal programme, which focuses on the disposal of less profitable and less sustainable pubs at prices that are value enhancing for Shareholders. Further, it will allow management to focus more on medium and long-term value creation without immediate concerns in respect of short-term debt management. The Board believes that this approach is an attractive alternative to disposing of core pubs at prices that would not be in the best interests of Shareholders in the longer term, and will enhance Shareholder value and strengthen the Company's balance sheet and overall financial position.

THE CONVERTIBLE BOND TENDER

The Convertible Bond Tender will invite Bondholders to offer any or all of the outstanding Convertible Bonds which they hold for purchase by the Group at a price of not less than 95 per cent. (as a percentage of the nominal principal amount outstanding of the Convertible Bonds). Subject to the condition that the Firm Placing and the Placing and Open Offer complete (a condition waivable by Punch in its discretion), the Group intends to purchase all of the Convertible Bonds offered pursuant to the Convertible Bond Tender.

USE OF PROCEEDS

The Board proposes to use a portion of the net proceeds of the Firm Placing and Placing and Open Offer to fund the purchase of any Convertible Bonds offered pursuant to the Convertible Bond Tender. The Board will consider repurchasing any remaining Convertible Bonds as and when appropriate opportunities arise or will redeem them on maturity.

It is intended that the balance of the net proceeds will be used for the Group's general corporate purposes, including selective repurchases of securitisation notes (at a discount to par, where possible), as and when appropriate opportunities arise, which in turn will assist the Group in providing covenant headroom under the securitisations.


DIVIDEND

Given the slowdown in the market in which Punch operates and the Group's operating results and financial condition, the Board currently considers it prudent to retain cash and further strengthen the Company's balance sheet ahead of returning cash to Shareholders through distributions. The Board did not recommend a final dividend for the 2008 financial year or an interim dividend for the 2009 interim period, and does not anticipate the Company paying or declaring any dividends for the remainder of the 2009 financial year.

CURRENT TRADING AND PROSPECTS

The Group today released its Interim Management Statement for the 40 weeks from the start of the financial year on 24 August 2008 to 30 May 2009. In that announcement, the Company made the following statement about the Group's current trading and prospects:

 'Trading results to date reflect the challenging market conditions being faced by the sector. The wider recessionary economic conditions have significantly reduced consumer confidence and impacted the level of disposable income being made available for leisure activities. 

Although we anticipate that demand levels are unlikely to improve in the near term, we are on track to meet our expectations for the financial year. Trading performance in the third quarter of the financial year shows early indication that our actions to stabilise performance are seeing some success. Improved trading during March and April benefited from softer comparatives, principally due to a later Easter this year and a poor, early Easter last year. Trading during May has been more mixed given tougher, weather driven comparatives a year ago.'

While we are confident of the longer term prospects for the Group and our expectations for the full year remain unchanged, we remain very cautious over the near-term due to the lack of forward visibility on trading outlook.'

BUSINESS AND ENTERPRISE SELECT COMMITTEE REPORT

The House of Commons Business and Enterprise Select Committee ('BESC') published its report on pub companies on 13 May 2009. The inquiry was established to review progress since a previous report on pub companies by the House of Commons Trade and Industry Select Committee ('TISC') in 2004. BESC recommended that:

·         the Secretary of State urgently refer the sector to the Competition Commission (“CC”) for a market investigation;
·         pub companies offer lessees, on a phased basis, a choice between a free-of-tie lease and a tied lease;
·         there be improved transparency in the rent assessment process;
·         the renting of leisure machines should no longer be on a tied basis; and
·         there should be a ban on pub companies imposing restrictive covenants when selling individual pub properties preventing their further use as a pub.

It remains to be seen how the Secretary of State will respond to the BESC recommendation and what form any further investigation by either the Office of Fair Trading ('OFT') or the CC will take. However, the Company takes comfort from the fact that the European and UK competition authorities have investigated pub tie arrangements several times and concluded that they are not anti-competitive where they incorporate a policy of multi-sourcing and periodic tendering (as the Company's do). Moreover the OFT's written evidence to BESC noted that it had received no evidence or complaints that led it to alter its previous position (when responding to the TISC in 2004) that there is no significant competition problem in relation to the beer and pub market. The Company believes that, should the Government (or the OFT) decide to refer the matter to the CC on this occasion, the outcome will not lead to a prohibition of the beer tie.

The Company recognises however that there are a number of issues facing the pub industry at present and whilst these cannot be attributed exclusively to the pub company model, it is in the Company's own and its lessees' interests to address the issues that have been raised by BESC. Indeed, the Association of Licensed Multiple Retailers ('ALMR') wrote to the Chairman of the BESC on 10 June, noting that it was working with a number of industry stakeholders (including the Company) to address the issues raised by BESC, by negotiating changes in industry practice through a formal mediation process with the intention of introducing legally binding changes in the relationship between pub companies and their lessees. AMLR hopes to reach a resolution within six months.

In the Company's response to the BESC it will be:

·         supporting the creation of an independent process for accrediting improved transparency in rent assessments, including supporting the plans of the British Institute of Innkeeping to introduce a low cost arbitration plan for determining rents;
·        confirming the Company’s commitment set out in a letter of 11 December 2008 to BESC offering lessees the opportunity to buy their pub from the Company (as at 5 June 2009 approximately 300 of the Company’s lessees have either exchanged, completed or are at some stage of the legal sale process for the purchase of their pub);
·        explaining how the leisure machine tie optimises machine returns. The Company will however review the division of machine income and will remove the lessee’s machine share from rent calculations in future rent reviews;
·        confirming the Company’s commitment to fair insurance contracts – if lessees can better the price of insurance for comparable cover that the Company is able to procure, the Company will reimburse the difference; and
·        confirming the Company’s commitment to cease imposing restrictive covenants on future sales of individual properties.

Prospectus and General Meeting

A combined Prospectus and circular will be sent to Shareholders (other than Excluded Shareholders) shortly containing full details of how Qualifying Shareholders (other than Excluded Shareholders) can participate in the Open Offer together with a formal notice of the General Meeting. Shareholders with registered addresses in the United StatesAustraliaCanada or New Zealand will receive a circular containing the formal notice of the General Meeting and explaining why the General Meeting has been called.

The General Meeting will be held in early July. The purpose of the General Meeting is to consider and, if thought fit, to pass the resolutions necessary to authorise and carry out the Firm Placing and the Placing and Open Offer.

Shareholders should read the full text of the resolutions contained in the notice of General Meeting in the Prospectus and the Circular.  

APPENDIX I

RISK FACTORS

The Firm Placing and the Placing and Open Offer and any investment in Punch are subject to a number of risks. Accordingly, investors and prospective investors should carefully consider the risks and uncertainties described below, together with all other information contained in this announcement, prior to making any investment decision.

The risks and uncertainties described below represent those known to the Directors as at the date of this announcement which the Directors consider to be material. However, these risks and uncertainties are not the only ones facing the Group; additional risks and uncertainties not presently known to the Directors, or that the Directors currently consider to be immaterial, could also have an adverse effect on the Group's business. If any or a combination of these risks actually occurs, the operating results, financial condition and prospects of the Group could be adversely affected. In such case, the market price of the Ordinary Shares could decline and investors may lose all or part of their investment. 

Investors and prospective investors should consider carefully whether an investment in Punch is suitable for them in light of the information in the Prospectus. 

1.    RISKS RELATING TO THE GROUP'S BUSINESS

 (i) Unfavourable general economic conditions in the United Kingdom have had and may continue to have a negative effect on the Group's business.

All of the Group's pubs are located in the United Kingdom and, therefore, the results of the Group's operations are substantially influenced by general economic conditions in the United Kingdom. In particular, the Group's revenues are affected by the levels of consumer confidence and expenditure on leisure activities.

The UK economy is currently in recession which has had (and continues to have) an adverse effect on consumer confidence and expenditure, and Punch is unable to predict how severe or prolonged this recession will ultimately be. In addition, economic factors such as rising interest rates, declining wages, higher unemployment, tax increases, lack of consumer credit and falling house prices could all adversely affect the level of consumer confidence and expenditure. 

Any reduction in levels of consumer confidence or expenditure could further adversely affect the Group's operating results, financial condition and prospects, including the ability of the Group to service its debt and comply with key debt covenants in the longer term.

(ii)    The Group has substantial debt, the servicing of which requires the allocation of a majority of cash flow from operations

As at 30 May 2009, the Group had total net debt (exclusive of derivative financial instruments) of approximately £4.35 billion. This debt is principally contained within three securitisations and the Convertible Bonds. Under the securitisations, the respective issuing vehicles have issued fixed and floating rate notes with an aggregate principal value of approximately £4.23 billion outstanding as at 30 May 2009, secured over more than 7,900 of the Group's 8,165 pubs, and with maturity dates from 2011 to 2035. The Convertible Bonds had an aggregate principal value (including accreted redemption premium payable) of £215 million outstanding as at 30 May 2009, with a maturity date of 14 December 2010.

The Group's debt levels currently require it to dedicate a majority of its cash flow from operations to debt service payments, which reduces the availability of cash flow to fund working capital, capital expenditure, expansion efforts, distributions to Shareholders and other general corporate purposes.

The Group's level of debt also can create operational difficulties. For example, following the ratings downgrade of some of the notes issued under the Group's securitisations (together with adverse press coverage of the Group's financial performance and that of the sector as a whole), it has become more difficult for some suppliers to obtain credit insurance in respect of the Group, increasing the risk of suppliers no longer willing to contract with the Group or requesting shorter payment terms. There is also a risk that ratings downgrades of the notes issued under the Group's securitisations could increase related ancillary finance costs, such as the cost of the financial guarantees for certain of those notes.

(iii)    Economic conditions may affect the Group's ability to comply with its financial covenants in the longer term and result in a default by the Group

The terms of the Group's securitisations, in keeping with other securitisations of their type, contain financial covenants which test the performance of the relevant securitisation. Those financial covenants include: a ratio of EBITDA to debt service; a minimum net worth covenant (in the case of two of the securitisations) and a loan to value ratio (in the case of one of the securitisations). If in the longer term any of such covenants are breached, due, for example, to a decline in the Group's operating profit resulting from economic conditions, it may result in an event of default in a securitisation which, if not cured or waived, could result in the enforcement of security within a securitisation and/or the appointment of an administrative receiver to the securitisation group and/or the acceleration of all or a substantial portion of the Group's debt,

The obligation to repay the notes issued under each of the Group's securitisations is limited in recourse to the assets of the companies within the relevant securitisation group. Accordingly, as is common for transactions of this type, there are no cross-default clauses in the securitisations providing that an event of default is triggered under the securitisations as a result of a default in, or acceleration of, the Group's debt outside the relevant securitisation group (including a default under another securitisation group's debt or a payment default under the Convertible Bonds). By contrast, the Convertible Bonds contain a cross default clause which is triggered if any of the debt of the Group is not paid when due or if any of the debt in the Group is accelerated, subject in each case to a de minimis of £2,500,000. A payment default or acceleration of the debt in the Group's securitisations would be caught by this clause.

In the longer term, a default in the securitisations could therefore lead to an acceleration of the Convertible Bonds. This, in turn, would have an adverse effect on the Group's financial position in the longer term.

(iv)    The Group is subject to covenants that may restrict its operations in the longer term

In addition to financial covenants, the terms of the Group's securitisations, in keeping with other securitisations of their type, contain covenants imposed upon certain members of the Group, which, if the performance tests in, or the provisions of, those covenants are not complied with or met or are otherwise triggered (which may arise, for example, due to a decline in the Group's operating profit or a significant decrease in pub values), will reduce the Group's flexibility in conducting its operations and will limit its ability to engage in activities that may be in its long-term best interest. This may have an adverse effect on the financial condition and prospects of the Group in the longer term.

In particular and as noted below, the Group's securitisations contain so-called ''restricted payment conditions'', pursuant to which each securitisation group is required to satisfy certain performance tests before the members of those groups can make certain payments (including dividends and loans) to members of the Group outside of the relevant securitisation. Being unable to satisfy the performance tests contained in those ''restricted payment conditions'' (as is currently the case for the Spirit Debenture) restricts the upstream flow of cash to Punch, which could have an adverse impact on the wider Group's working capital, capital expenditure, expansion efforts, repayment of outstanding debt (in particular, the Convertible Bonds), distributions to Shareholders and the Group's business generally. At present, both the Punch A Securitisation and the Punch B Securitisation satisfy the performance tests for making payments outside of their respective securitisations. Punch does not expect that such performance tests will continue to be met in the next financial year, but Punch does not expect this to affect the Group's ability to reduce debt levels within the respective securitisations.

The Group's ability to repurchase notes will depend on various factors, including the level of cash flow from pub disposals, whether excess cash can be generated from pub operations and other factors, including tax considerations and the trading prices of the listed notes. The price for pub disposals is dependent on the projected cash flow for the pubs, which is difficult to predict in the current economic environment.

The covenants contained in the securitisations restrict, among other things, the ability of certain members of the Group (including the main operating companies within the Group's securitisations) to:

·         pay dividends, or make loans to members of the Group outside the securitisations, without satisfying certain financial tests;
·         conduct acquisitions, mergers, or consolidations other than with the consent of the relevant trustee and on certain prescribed terms;
·         sell assets without satisfying certain financial tests and without using the proceeds from such sales for certain permitted uses;
·         incur additional debt on unsubordinated terms or in excess of certain thresholds and without satisfying certain financial metrics;
·         create security interests securing indebtedness, other than certain permitted security interests;
·         incur capital expenditure in excess of certain thresholds; and
·          raise capital.

These restrictions could have an adverse effect on the financial condition, results of operations and prospects of the Group in the longer term.

(v)    The occurrence of a default in one of the securitisations could have a material adverse effect on the Group's business

Most of the Group's assets are owned by companies which are part of the Group's securitisations. These Group companies have granted security over those assets in order to secure their obligations under the securitisations. The ability of these companies to meet their obligations under the securitisations will continue to depend upon the performance of the business within the relevant securitisation and their other financial obligations. The performance of each business within a securitisation is affected by factors including (but not necessarily limited to) those described in this section headed ''Risks Relating to the Group's Business''.

A deterioration in the performance of the Group's business within a securitisation group could, in the longer term, result in a breach of the provisions of that securitisation, which in turn could lead to an event of default under the relevant securitisation. The consequences of an event of default in one of the securitisations include, but are not limited to, the enforcement of the security granted by the companies in that securitisation group, which might result in the sale of pubs in that securitisation group and the realisation of its other assets. The enforcement of security could result in the appointment of an administrative receiver in respect of the companies within that securitisation, which would result in those companies ceding control of their business to the administrative receiver. In addition, an event of default in the Punch A Securitisation, if it led to the enforcement of security or the appointment of an administrative receiver in respect of Punch Partnerships (PTL) Limited (formerly Punch Taverns (PTL) Limited), could affect that company's function as a provider of management services to the wider Group, including Group companies in the Punch B Securitisation and the Spirit Debenture. The appointment of an administrative receiver or enforcement of security in a securitisation may also affect the ability of the wider Group to negotiate supplies for and services to its other pubs. An event of default within any of the securitisations could, therefore, have an adverse effect not only on the relevant securitisation but also on the wider Group (which includes the possibility of acceleration of the Convertible Bonds, as described in the section headed ''Economic conditions may affect the Group's ability to comply with its financial covenants in the longer term and result in a default by the Group'').

(vi)    The ongoing disruptions in the financial markets may adversely affect the Group's business and its ability to refinance its debt

Current global credit market conditions are having a material impact on the availability of debt, making terms for certain financing less attractive and, in some cases, have resulted in a lack of availability of certain types of financing. Continued uncertainty in the credit markets may negatively impact the Group's ability to access financing on reasonable terms or at all, which may have an adverse impact on the Group's financial condition. A prolonged downturn in the credit markets may require the Group to seek alternative sources of potentially less attractive financing and may require the Group to adjust its business operations accordingly.

In particular, if the current pressures on the availability of debt continue or worsen, the Group may not be able to refinance, if necessary, its outstanding debt when due (including the Convertible Bonds due in 2010), or debt under the securitisations which, in certain cases, if not refinanced by a certain date will bear interest at a higher rate than at present. Such failure to refinance debt could have an adverse effect on the Group's operating results, financial condition and prospects in the longer term.

(vii)    An increase in the trading prices of the Group's securitisations notes would adversely affect the Group's objective of reducing debt 

One of the Group's key objectives has been to reduce debt levels by, among other things, repurchasing securitisation notes at a discount to par. The trading prices of the Group's securitisation notes fluctuate, and in recent times have been increasing. If the trading price of the securitisations notes continues to increase this would have an adverse effect on the Group's objective of reducing debt by repurchasing securitisation notes.

(viii)    The Group's business is exposed to interest rate risks from its financial instruments.

The Group finances its operations primarily through long-term borrowings (including notes issued under its securitisations and the Convertible Bonds) and equity contributions from Shareholders.

The Group borrows at both fixed and floating rates of interest and then employs derivative financial instruments such as interest rate swaps to manage the Group's exposure to interest rate fluctuations. These derivative arrangements expose the Group to the risk that a counterparty will not perform its obligations or that an arrangement will be unenforceable.

Cash flows associated with cash deposits and interest rate swaps and the fair value of these financial instruments fluctuate with changes in interest rates. For example, for the 2008 financial year, the Group incurred a £31.1 million charge for the mark-to-market of certain interest rate hedges. The use of fixed-rate borrowings and derivative financial instruments exposes the Group to the risk that the Group does not benefit from falls in interest rates and is exposed to unplanned costs, such as breakage costs, when debt or derivative financial instruments are restructured or repaid early.

(ix)    Consumer perceptions and public attitudes toward the consumption of alcohol may continue to change

 In the United Kingdom, consumption of alcoholic beverages has become the subject of considerable social and political attention in recent years due to increasing public concern over adverse health consequences associated with the misuse of alcohol (including alcoholism) and alcohol-related social problems (including drink-driving, binge drinking and under-age drinking). Changes in consumer tastes in both food and drink, and demographic trends over time have adversely affected, and may continue to adversely affect, the appeal of the Group's pubs to consumers, especially if the Group does not anticipate, identify and respond to such changes by evolving its brands, formats, offerings and premises. This, in turn, would have an adverse effect on the Group's operating results, financial condition and prospects.

In addition, any increased focus on the potentially harmful effects of alcohol, such as a public service advertising campaign by the UK government, might reduce sales of alcoholic beverages and therefore negatively affect the Group's operating results, financial condition and prospects.

(x)    Sales of beer may continue to decline and increase the number of defaults and business failures among retailers

A significant portion of the Group's revenue is currently derived from the sale of beer to its retailers and customers. Beer sales (by volume) have been in decline for a number of years and in recent years the rate of decline has increased, with a disproportionate impact on the on-trade market. For instance, while there was a 5.3 per cent. annual volume decrease in total beer sales in the United Kingdom in 2008, over the same period on-trade sales decreased by 9.3 per cent. The decline is principally as a result of a decline in the number and proportion of male pub visitors and an increase in beer sales in the off-trade. Growing health and drink-driving concerns, the smoking ban, the ability of consumers to purchase canned or bottled beer at lower prices in many off-licences and supermarkets, the expansion of trading hours at those outlets and increased entertainment options at home, have also contributed to the downward trend in beer sales in pubs in recent years.

If the Group is not able to develop its income streams from products other than beer, a continued decline in the UK beer market could have an adverse effect on the Group's revenues. A decline in the UK beer market or in the ability of pubs to attract customers could also result in an increase in defaults and business failures among retailers within the Group's leased estate, which could adversely affect the Group's operating results, financial condition and prospects.

(xi)    Revenues from leisure machines may continue to decline, including as a result of the potential prohibition of the tie of leisure machines in pub leases

A portion of the revenue of pubs within the Group's leased estate is currently derived from leisure machines (also known as gaming machines). This revenue has been in decline in recent years, principally as a result of the smoking ban, changes in the law regulating leisure machines and increased competition from fixed-odds betting terminals in licensed betting offices and other venues. Punch expects this trend to continue in the foreseeable future. If affected pubs are unable to develop alternative income streams, a continued decline in revenues from leisure machines could have an adverse effect on the Group's operating results, financial condition and prospects. 

In addition, a recent report from the Business and Enterprise Select Committee of the House of Commons recommended removal of the tie of leisure machines in pub leases. If this recommendation were followed it would affect the arrangements between the Group and its retailers with respect to the sharing of revenue from leisure machines in the Group's leased pubs. This could have an adverse effect on the Group's operating results, financial condition and prospects, including as a result of the potential prohibition of the tie of leisure machines in pub leases.

(xii)    The Group's pubs face a high level of competition for consumers

The Group's pubs compete for consumers with a wide variety of pubs and restaurants as well as off-licences, supermarkets and takeaways, some of which may offer higher amenity levels or lower prices or be backed by greater financial and operational resources. Any provider of leisure facilities or services which could draw consumers away from the Group's pubs is potentially a competitor of the Group. This includes providers of certain products and services for the family home, which has become an increasingly attractive option for consumers, with improvements in home entertainment, the availability of cable and satellite television and the expansion of internet usage. The on-trade beer market in the United Kingdom has recently been impacted by the pricing policies of the large supermarket groups, with the off-trade accounting for a greater proportion of UK beer sales than in the past, and by the introduction of the smoking ban. The Group's business also faces increasing competition from other pub operators. The Group's pubs may not be successful in competing against any or all of these alternatives and a sustained loss of customers to other pubs or leisure activities, a decline in beer prices as a result of increased competition or increased consumption of alcohol at home could have an adverse effect on the Group's operating results, financial condition and prospects.

(xiii)    Continued consolidation in the pub industry in the United Kingdom may result in the Group being unable to compete with larger competitors

The pub industry in the United Kingdom has undergone periods of consolidation through joint ventures, mergers and acquisitions. Continuing consolidation in the pub industry in the United Kingdom could lead to the emergence of larger competitors, who may have greater financial and operational resources than the Group. The Group may not be able to respond to the pricing pressures that may result from continued consolidation of the pub industry in the United Kingdom and may not be able to compete successfully for the acquisition of pubs and pub-owning companies with larger competitors. If the Group does not continue to be a major participant in the pub industry in the United Kingdom, it may not be able to secure favourable pricing from suppliers or attract suitable retailers to lease the Group's pubs, which could have an adverse effect on the operating results, financial condition and prospects of the Group.

(xiv)    An increase in global food prices may negatively impact the profitability of the Group's managed pubs

Food purchases account for a significant portion of the operating expenses of the Group's managed estate. Recent increases in global food prices have had a negative impact on operating margins for these pubs. Prices remain subject to volatility and if further rises were to occur (including as a result of a depreciation of the pound sterling), this could result in a reduction of margins and profits from the Group's managed estate, which in turn could have an adverse effect on the Group's operating results, financial condition and prospects.

(xv)    An increase in energy costs may negatively impact the profitability of the Group's managed pubs.

The Group's managed estate is a large commercial user of gas and electricity, and is subject to fluctuations in energy costs. Recent increases in energy prices have had a negative impact on operating margins for the Group's managed pubs. The Group may not be able to increase its prices to offset any future or further increases in such costs without suffering reduced sales and revenue, which could in turn have an adverse effect on the Group's operating results, financial condition and prospects.

(xvi)    The Group's revenue is affected by the weather and the timing of major sporting events

Attendance levels at the Group's pubs are affected by the weather and the timing of major sporting events. Persistent rain or other inclement weather, especially during the summer months or over the Christmas period, which are peak trading times, can have a negative effect on revenue generated by the Group's pubs and this, in turn, can have an adverse effect on the Group's operating results, financial condition and prospects.  

Major sporting events, especially those in which British teams are successful, can also impact revenue. The absence of major events, or the poor performance of a British team, could have an adverse effect on the Group's operating results, financial condition and prospects.

(xvii)    Incidents involving the abuse of alcohol, use of illegal drugs and violence are a significant risk to the Group's operations

Incidents involving the abuse of alcohol, use of illegal drugs and violence on the Group's premises may continue to occur or may increase in frequency. Such activity may directly interrupt the operations of the Group and could also result in litigation or regulatory action, either of which could adversely affect the Group's operating results, financial condition and prospects.

(xviii)    Food or beverage contamination or other health scares could adversely affect the Group's operations

The Group is susceptible to major local, national or international food or beverage contamination or other health scares (for example, salmonella and E. coli, ''swine flu'' or ''H1N1'' and other airborne diseases) affecting the type of food and beverages sold in, and attendance levels at, the Group's pubs. Such contamination or scares could affect consumer confidence and preferences, resulting in reduced attendance or expenditure at the Group's pubs, or could lead to increased costs for the Group (including in relation to sourcing alternative suppliers or products). In addition, a serious contamination or scare at one of the Group's managed pubs could negatively affect the reputation of brands used in the managed estate. A food or beverage contamination or other health scare could therefore negatively impact the Group's operating results, financial condition and prospects.

(xix)    The Group is dependent on volume discounts based on targets which, if not met, could increase the Group's operating costs

The profitability of the Group is affected by its ability to meet volume targets in its beer supply contracts. There is a risk that the Group may be unable to meet these volume targets as a result of a number of factors, including a failure to negotiate more favourable volume targets, disposals of pubs (which reduces the overall size of the Group's pub estate and therefore the volume of beer sold by the Group), changes in the general economic climate and other factors adversely affecting sales of beer. An inability to meet applicable volume targets could increase the Group's operating costs which could, in turn, have an adverse impact on the Group's operating results, financial condition and prospects.

(xx)    Minimum volume requirements in supply arrangements, if not met, could give the Group's suppliers the right to terminate these arrangements. 

The Group's failure to meet minimum volume obligations, coupled with a subsequent failure to pay any resulting liquidated damages, could give rise to termination rights in favour of a supplier under the relevant supply agreement. In any event, where a supply agreement is terminated (including as a result of the insolvency of any key supplier), the Group may be required to source drink products from elsewhere, exposing the Group to potentially increased operating costs which may, in turn, have an adverse impact on the Group's operating costs, financial condition and prospects.

(xxi)    The Group relies on a limited number of suppliers and if such suppliers continue to consolidate, or face business difficulties, prices paid by the Group to suppliers may rise or the Group's operations may be disrupted. 

The brewing and distribution industry in the United Kingdom has seen a movement towards consolidation in recent years, which reduces the number of suppliers available to the Group and may have the effect of raising prices paid by the Group. The Group relies on an increasingly limited number of major brewing companies to supply it with beer and other drink products, with over 84 per cent. of the Group's beer and cider supplied by Carlsberg UK, Diageo, InBev UK, Molson Coors (UK) and Scottish & Newcastle UK during the past 12 months. In addition, the Group primarily uses one supplier for warehousing, distribution and food supply services, and if this supplier failed to meet agreed service levels it could create difficulties for the Group. Furthermore, replacing this supplier could be difficult and disruptive. Further consolidation could increase the Group's reliance on a limited number of suppliers, who might then be able to exert additional pressures on the Group which could have the effect of raising prices paid by the Group for goods bought or delivered. The Group's costs could also increase and its business could be disrupted to the extent the Group's suppliers face business or financial difficulties due to the current economic environment. These risks could result in an increase in the Group's operating costs which would, in turn, have an adverse impact on the Group's profitability, financial condition and prospects.

(xxii)    Fluctuations in the property market in the United Kingdom could reduce the value of the Group's properties

The property market is subject to fluctuations, and if the current downturn in the market continues it could lead to a sustained reduction in the Group's freehold property values over time. There can be no certainty that property values will recover at any particular time, or at all. In addition, valuations of pub assets are impacted by the trading performance of the pubs, with poorer trading generally leading to lower valuations. Where impairment indicators are identified, the Group's pubs are reviewed for impairment on an individual basis. If the recoverable amount of an individual pub (based primarily on value-in-use) is less than the carrying value of that pub in the Group's accounting records, an impairment charge is recognised. For the 28 weeks ended 7 March 2009, the Group incurred a pub impairment charge of £146.6 million before tax. In addition, a reduction in value of the Group's pubs will negatively affect compliance with certain covenants under the Group's securitisations.

A continued weakening in trading conditions and the property market could therefore negatively impact the Group's operating results, financial condition and prospects, including its ability to comply with covenants under its securitisations in the longer term.

(xxiii)    The value realised by the Group on disposals of pubs may be adversely impacted by fluctuations in the property market, the inherently illiquid nature of pubs and other factors

The strategy for managing the Group's estate includes the disposal of less sustainable or less profitable pubs. This disposals programme has recently been accelerated with the objective of increasing cash flow and reducing debt within the Group. During a downturn in the property market, such as the current downturn, the proceeds received by the Group from such disposals may be reduced. As valuations of pub assets are affected by the trading performance of the pubs, a recessionary economic climate, such as in the United Kingdom at present, which results in poorer trading, will generally lead to lower valuations for pub assets and, in turn, could adversely impact the proceeds received by the Group from disposals. In addition, portfolios of pubs are inherently illiquid and cannot be sold quickly, which means that the Group may not be able to vary its portfolio of pubs quickly in response to changes in economic or other conditions. The Group's securitisation programmes also contain limitations on the disposal of pubs and how the proceeds from disposals are applied, and these limitations may adversely affect the value realisable by the Group from pub disposals.

The realisation of significantly lower proceeds than expected from disposals or the inability of the Group to respond promptly to changes in the performance of the Group's pubs could adversely affect the Group's cash flow, financial condition and prospects in the longer term.

(xxiv)    The disposal of pubs may give rise to capital gains which could result in tax charges for the Group

When the Group disposes of pubs it may give rise to a capital gain which, if the Group did not have sufficient capital losses or non trading deficits available to off-set these gains, could result in a tax charge for the Group. As at 23 August 2008, a deferred tax liability relating to gains on property of £209.8 million was provided for within the accounts, representing the potential tax liability on properties net of tax assets available for off-set. Such tax charges could have an adverse effect on the Group's cash flow, financial conditions and prospects.

(xxv)    The Group may have to bear liability for leasehold properties which it has sold to third parties 

Over time, a number of pubs have been sold by members of the Group to third parties. Disposals have been by way of sale of individual pubs or as portfolios. The majority of leases in this category have been disposed from the managed pub estate. Where the properties disposed are leasehold, the Group remains liable to perform the tenant's obligations in the lease if the purchaser fails to do so. Purchasers are required to indemnify the Group against this contingent liability. However, in the event that a purchaser fails to comply with the tenant's obligations in a lease, and the Group is unable to recover pursuant to the indemnity (most usually because a purchaser becomes insolvent), the Group may suffer a loss as a result of its obligation to continue performing the tenant's obligations (including the payment of rent) under the lease. In these circumstances, to try to limit the potential losses, the Group is most likely to take an assignment back of the leases to such properties in consideration of the assumption by the Group of the tenant's obligations under each lease. For the 28 weeks ended 7 March 2009, a total of 50 managed leasehold pubs reverted to the Group in this manner, of which 31 had, as at 7 March 2009, resumed trading and the remainder had closed pending sale. Further reversions of leasehold pubs to the Group could result in losses which would adversely affect the Group's operating results, financial condition and prospects.

(xxvi)    Retailers may fail to pay amounts due promptly or at all, and the Group may have to increase its level of support for struggling retailers

There is a general risk that rental and other payments owing to landlords in the Group (including, for example, for the supply of beer and other products to tenants and for receipts from leisure machines) will not be paid on the due date or will not be paid at all. A sufficient aggregation of such late or non-payments would affect the profitability of the Group. Continued failure by a particular retailer to pay rental and other payments due to the Group will usually result in the termination of the tenant's lease and either the closure of the pub or the leasing of the relevant pub to a new retailer. Where a pub is leased to a new retailer, there may also be a period following the departure of the former retailer, and before a replacement retailer can be found, where cash flow to the Group is reduced. The relevant pub may also become vacant which would reduce the Group's revenue and its ability to recover certain operating costs (which would result in it incurring additional expenses until the property is re-let). The Group has recently experienced an increase in the number of pubs closing. Closed pubs constituted approximately 5 per cent. of the Group's leased estate as at 7 March 2009, as compared to approximately 3 per cent. as at 23 August 2008. In addition, the rent and other payments payable by the replacement retailer may not be as high as those payable by the former retailer. These risks could have an adverse effect on the Group's operating results, financial condition and prospects.

 Recently, the Group has been increasing its level of support for struggling retailers, in light of the difficult trading environment. In the first 40 weeks of the 2009 financial year to 30 May 2009, the Group provided financial support in the form of rent and non-standard discount concessions to retailers amounting to approximately £1.6 million per month, compared to an average of approximately £0.5 per month in the equivalent period in the previous year. The Group has established a ''Turnaround Division'', providing increased business support for pubs experiencing the most financial difficulty or deemed unlikely to generate long-term sustainable growth, which as at 30 May comprised 1,114 pubs, making approximately 15 per cent. of the Group's leased pub estate. A continued weakening of the UK economy may require the Group to increase levels of support to retailers, which could result in a decrease in the Group's revenue and, in turn, adversely affect the Group's operating results, financial condition and prospects. 

(xxvii)    The Group does not control the operations of its leased and tenanted pubs

The Group's leased and tenanted pubs are let to retailers who are generally free to operate and manage the pub as they see fit, subject to the terms of their lease or tenancy agreements. Since a substantial proportion of the Group's turnover is currently derived from the sale of drink products to its retailers, declining sales due to local factors over which the Group may have no direct control, such as poor pub management, ineffective marketing or changing local demographic trends, may result in a decline in the Group's sales to that pub. In addition, dishonest retailers under-reporting sales volumes or selling third party beer in contravention of a tie arrangement could adversely affect the Group's revenue. 

Unless a retailer fails to pay rent or otherwise comply with the terms of a lease or tenancy agreement, the Group cannot remove an under-performing retailer by terminating the lease or tenancy agreement early or by refusing to renew the relevant agreement automatically at the end of its term. Persistent under-performance by retailers would, in the aggregate, result in a decrease in the Group's revenue and could adversely affect the Group's operating results, financial condition and prospects.

(xxviii)    The Group may be unable to attract high-quality retailers to lease its pubs

Individuals within or seeking to enter the pub operating business have several alternatives to being a retailer of one of the Group's pubs, any one or more of which may prove to be more attractive depending on their personal circumstances. These include becoming an employee of a managed pub company, acquiring a pub freehold or leasehold outright or joining one of numerous other leased or tenanted pub companies as a lessee or tenant. Licensed restaurants, cafes and bars can also offer attractive business opportunities for the type of retailers that the Group would like to attract. In addition, recent adverse media reporting about retailers deriving low earnings and the pub industry in general may also have an impact on the willingness of individuals to become or continue to be retailers in the Group's pubs. The Group may not be successful in convincing current or prospective retailers of the benefits of leasing its pubs and the Group may lose high quality retailers as a result, which may adversely affect the Group's operating results, financial condition and prospects.

(xxix)    The rent determination and review arrangements in the Group's lease and tenancy agreements can lead to decreased rents and the length of the Group's leases have become shorter

The Group receives fixed rental payments from each of its retailers, at a rate negotiated when the lease or tenancy agreement is signed. Rental rates for a given pub are assessed by the Group on the basis of its likely level of retail trading. If the Group initially underestimates the likely level of retail trading for a pub, it may, in certain circumstances, agree to a lower fixed rent and consequently receive a smaller overall share of the pub's profits until the next rent review.

Additionally, the tenancy agreements and leases for certain pubs in the leased pub estate contain open market rent review provisions. Therefore, it is possible that rents from such pubs could decrease if the open market rental value at the time of review is less than the rent then payable. Moreover, regardless of the terms of the relevant rent review provision, the Group may agree to lower the rent payable, as appropriate, in light of economic or other circumstances. In addition, some of the tenancy agreements and leases for the Group's pubs in its leased estate also provide for annual rent reviews by reference to movements in the retail prices index. A decrease in the retail prices index would reduce the rents payable in respect of those pubs. Any of the foregoing developments will decrease the Group's revenues which, in turn, may adversely affect the Group's operating results, financial condition and prospects.

The average length of the Group's leases has become shorter as leases which the Group has recently entered into have significantly shorter terms, reflecting the difficult trading and financing environment for pub operators. The shorter leases increase the risk that the Group may have to close pubs when the leases expire, which would adversely affect the Group's operating results, financial condition and prospects.

(xxx)    The Group is dependent on key executives and personnel for its future success

The Group's future success is substantially dependent on the continuing services and performance of key executives and its ability to continue to attract and retain highly skilled senior management and qualified pub managers. The current Directors and members of the management team may not remain with the Group. The failure to retain or recruit suitable replacements for any of the Directors, the management team or significant numbers of other key employees could have a adverse effect on the Group's operating results, financial condition and prospects.

(xxxi)    Computer or information system breakdowns could impair the Group's ability to conduct its business

If any of the Group's financial, human resources, communication or other systems were to be disabled or did not operate properly (including as a result of computer viruses, problems with the internet or sabotage), the Group could suffer disruption to its business and supply chains, incur liability to retailers or customers or experience loss of data. This could have a significant effect on the Group's ability to conduct its business which, in turn, could have an adverse effect on the Group's operating results, financial condition and prospects.

(xxxii)    The Group's insurance may be insufficient and certain types of loss may be uninsurable

There is a risk that the Group's properties could suffer damage so extensive that it is not fully covered by the insurance the Group holds. Moreover, certain types of risk are not insured fully either because such insurance is not available or because the premium costs are disproportionate to the risks in question. If an uninsured loss (or a loss above the level of the Group's insurance coverage) occurs at one or more of the Group's properties, the Group could lose all or a portion of the capital it had invested in, as well as any anticipated future revenue from, such properties. In addition, the Group could be liable to repair damage caused by uninsured risks, and could remain liable for any debt or other financial obligation related to those properties. Any such occurrence could have an adverse effect on the Group's operating results, financial condition and prospects.

(xxxiii)    The pub industry in the United Kingdom is highly regulated and pub operations require licences, permits and approvals

The Group's pubs are subject to laws and regulations that affect their operations, including in relation to employment, minimum wages, pub licensing, alcoholic drinks control, leisure (gaming) machines, competition, health and safety, sanitation, data protection and access for the disabled. These laws and regulations impose a significant administrative burden on the Group and its retailers, as managers and retailers have to devote significant time to compliance with these requirements and therefore have less time to dedicate to trade. If additional or more stringent requirements were to be imposed in the future, it would increase this burden, which could adversely affect the Group's operating results (as a result of increased costs or lower revenues) and, in turn, adversely affect the Group's financial condition and prospects.

(xxxiv)    The Group may experience delays and failures in obtaining and retaining required licences, permits and approvals

Each of the Group's pubs is licensed to permit, among other things, the sale of alcoholic drinks. Difficulties or failures in obtaining or maintaining required licences or approvals could delay or prohibit the operation of the Group's pubs. If any of the Group's pub licences were withdrawn or amended, the profitability of the affected pubs could be adversely affected and this, in turn, may have an adverse effect on the Group's operating results, financial condition and prospects. 

Licensing requirements which affect the Group's pubs are subject to change, and additional or more stringent requirements may be imposed on the Group's operations in the future. This may reduce the ability of the Group's pubs to sell alcoholic drinks, which could have an adverse effect on the Group's operating results, financial condition and prospects.

(xxxv)    UK government legislation and campaigns against binge and under-age drinking and changes in drink-driving laws may reduce demand for the Group's alcoholic drinks

The UK government periodically contemplates imposing measures to curb binge and under-age drinking, including raising the legal drinking age to 21, the introduction of minimum prices for alcoholic drinks and the introduction of a mandatory code imposing certain conditions on all alcohol retailers. Any such measures could reduce the Group's flexibility to implement profitable business strategies and have a material effect on the Group's operating results, financial condition and prospects.

As car drivers and passengers account for a significant proportion of pub customers in the United Kingdom, the implementation of any legislation to reduce further the legal blood alcohol limit for drivers in the United Kingdom could result in customers in the Group's rural and suburban pubs drinking less or frequenting pubs less often, which could lead to a reduction in revenue in those pubs and a decline in the Group's overall income from the sale of alcoholic drinks. This, in turn, could have a negative impact on the Group's operating results, financial condition and prospectus. In addition, public service advertising campaigns by the UK government or other authorities warning against the dangers of drink-driving can adversely affect the level of our business.

(xxxvi)    The Group's tied pub lease and tenancy arrangements have been challenged as anticompetitive or otherwise unfair to its tenants

The Group operates tied pub tenancy arrangements which require lessees and tenants to obtain beer, and other beverages and ancillary products, including leisure machines, from a nominated supplier. These arrangements might constitute a breach of Article 81 (formerly Article 85) of the EC Treaty (''Article 81'') or Chapter 1 of the Competition Act (''Chapter 1'') in circumstances where the tie arrangements contribute significantly to the foreclosure of the UK market. If an agreement is in breach of Article 81 or Chapter 1, it is null and void. A serious breach of Article 81 or Chapter 1 can give rise to the imposition of fines. In addition, a breach of Article 81 or Chapter 1 can also give rise to claims for damages against one or more parties to the contract in question. It is possible that the benefit of the right to claim damages for breach of Article 81 could extend to a party to the contract, particularly where that party has a weak bargaining position. However, the European Commission has accepted that where a lease/tenancy agreement incorporates a policy of multisourcing and periodic tendering (as the Group's do), they should not infringe Article 81 or Chapter 1. The Office of Fair Trading (the ''OFT'') submitted to the Trade and Industry Committee in 2004 that there was no competition problem in relation to the beer and pub market and has more recently been of the view that the tie arrangements are excluded from Chapter 1. 

The Business and Enterprise Select Committee (''BESC'') of the House of Commons has recently conducted a parliamentary inquiry into pub companies. In its report to the House of Commons published on 13 May 2009, the BESC formed a provisional view that the beer tie should be ''severely limited'' but also stated that it was wary of simply recommending that the beer tie should be abolished. It recommended instead that the Secretary of State urgently refer the sector to the Competition Commission for an urgent market investigation. The Government is expected to respond to the BESC report within two months.

In addition, a ''super-complaint'' may be made to the OFT by a designated body alleging that there are features of the market which are or may be significantly harming the interests of consumers. The OFT must respond within 90 days of the super-complaint stating what action, if any, it proposes to take. One possible outcome of a super-complaint is for the OFT to refer the sector to the Competition Commission for a market investigation.

A market investigation by the Competition Commission could have adverse consequences for the Group, including the way in which it contracts with its lessees and tenants. In particular, in the event that it identifies features of the market which restrict competition, the Competition Commission would have a wide range of remedial powers. It is not possible to predict with any Certainty the impact of a market investigation on the Group.

The BESC also made other recommendations, including the removal of the tie on amusement with prizes (''AWP'') machines, a ban on restrictive covenants on disposal and measures to prevent inequalities of bargaining power between pub operators and lessees and to improve the transparency of rent assessments.

(xxxvii)    The taxes and duties to which the Group is subject may increase

The Group's activities are affected by a number of taxes and duties, such as the duty on alcoholic drinks, VAT and other business taxes. Changes in legislation which affect all or any of these matters may adversely affect the financial performance of the Group. The UK government has imposed a duty escalator which commenced from 23 April 2009, pursuant to which duties on alcohol will automatically rise each year by 2 per cent. above the retail prices index. (For 2009, the retail prices index has been set at 0 per cent. for these purposes, although it is as yet unclear exactly which retail prices index measure is proposed to be used). The UK government has also announced that the standard rate of VAT will revert from 15 per cent. to 17.5 per cent. from January 2010. To the extent that the Group does not pass any such duty or VAT increases on to its retailers and customers, this will reduce the Group's margins and could consequently have an adverse effect on the Group's operating results, financial condition and prospects. If the Group does pass these duty or VAT increases on to its retailers and customers, it could result in decreased demand and consequently could also have an adverse effect on the Group's operating results, financial condition and prospects.

(xxxviii)    Any violation of or change in the laws regulating leisure machines could have a negative effect on the profitability of certain pubs in the Group 

Many of the Group's pubs operate leisure machines (also known as gaming machines). The Gambling Act 2005, which came into force on 1 September 2007, includes explicit monetary limits on stakes and prizes and new social responsibility provisions requiring close supervision of games. There have also been changes to the broader categories of machines permitted in alternative venues, such as casinos, licensed betting offices and amusement arcades, that may increase the competitive threat to the Group's revenue from leisure machines. If the Group's pubs violate the regulatory gaming rules or if the new rules have the effect of increasing the appeal to customers of alternative venues, such as casinos, at the expense of the Group's pubs, this could have an adverse effect on the Group's operating results, financial condition and prospects.

(xxxix)    Employment regulations dictate the rights and protections of the Group's employees, and changes to these regulations may decrease the Group's ability to operate its business efficiently

The Working Time Regulations (the ''WT Regulations'') control the hours employees are legally allowed to work. Under the legislation, workers may only be required to work a 48-hour week (although they can choose to opt out and work longer if they wish). The WT Regulations also set out rights and protections in areas such as minimum rest time, days off and paid leave. Many employees of the Group are covered by the WT Regulations. The existence of the ability to opt out of, and the guidance as to who is covered by, the WT Regulations may possibly change in the future. In addition, under the Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000, part-time workers can claim the same rights as full-time workers. Similar provisions apply to employees engaged under fixed-term contracts under the Fixed Term Employees (Prevention of Less Favourable Treatment) Regulations 2002, under which employees, engaged under fixed-term contracts can claim the same rights as employees engaged under permanent contracts. The WT Regulations may impose constraints on the ability of the Group to deploy employees efficiently to a degree that adversely affects its operating costs and, in turn, its operating results, financial condition and prospects.

(xl)    The Group could be liable for environmental cleanup costs at its properties

The Group may be liable for the costs of removal, investigation or remediation of hazardous or toxic substances located on or in a property owned or leased by it. The costs of any required removal, investigation or remediation of such substances may be substantial. The presence of such substances, or the failure to remediate such substances properly, may also adversely affect the Group's ability to sell or lease the property. Furthermore, publicity surrounding the discovery of such substances could harm the Group's reputation. Changes in law or regulation may impose further liabilities on the Group, which may also form the basis for liability to third persons for personal injury or other damages. Although the Group is not aware of any material issues at any of its currently owned or leased properties, the discovery of previously unknown hazardous or toxic substances or the imposition of cleanup obligations at such sites could result in liabilities in the future. The costs of dealing with any such liabilities could adversely affect the Group's operating results, financial condition and prospects.

(xli)    The Group may need to increase contributions to cover deficits with respect to its pension schemes

The Group operates three defined benefit pension schemes: the Pubmaster Pension Scheme, the Spirit Group Pension Scheme and the Spirit Group Retail Pension Plan (each a ''Pension Scheme'' and together, the ''Pension Schemes''). These are all closed to new entrants. As at 7 March 2009, the total net liability in respect of the Pension Schemes was approximately £33 million calculated on an International Accounting Standard 19 basis.

There are many risks for the Group arising from the operation of the Pension Schemes, and a description of some of these follows. The Pensions Regulator may impose a scheme funding target and employer contribution rate, if those matters cannot be agreed between the scheme trustees and the relevant employers. In addition, the trustees of any Pension Scheme may wind up the relevant scheme, as permitted in certain circumstances. The Pensions Regulator also has a statutory power to order a Pension Scheme to be wound up. Winding up the schemes would result in a statutory obligation on the various participating employers to fund the schemes by reference to a ''buyout basis'' (which represents the estimated cost of securing members' benefits by purchasing annuity policies from an insurance company). Additionally, regulations provide that a similar statutory debt would be triggered for an employer participating in a multi-employer scheme if that employer went into liquidation. The Pensions Regulator may require funding or funding guarantees from members of the Group (in the form of a contribution notice or financial support direction) for defined benefit pension schemes in various circumstances. In addition, the trustees of the Pension Schemes may alter the investment profile of the relevant scheme. For example, the trustee could exchange equity investments for lower risk investments such as bonds, which would typically increase the employer funding obligations in relation to the schemes because of the lower rate of return expected from lower risk investments.

The foregoing risks are linked to the funding level of the Pension Schemes, which may be adversely affected by a number of factors, including: (i) reducing bond yields (since lower yields mean a pension obligation is assessed as having a higher value); (ii) increasing life expectancy (which will make pensions payable for longer and, therefore, more expensive to provide); (iii) investment returns failing to meet expectations; (iv) actual and expected price inflation, subject to the limits set out in the Pension Schemes' governing documentation; (v) funding volatility as a result of any mismatch between the assets held and the assets by reference to which the scheme liabilities are calculated; and (vi) other events occurring which make past service benefits more expensive than anticipated in the actuarial assumptions by reference to which past pension contributions were assessed, including unanticipated changes to tax or other legislation.

2.    RISKS RELATING TO THE FIRM PLACING, THE PLACING AND OPEN OFFER AND THE ORDINARY SHARES

(i)    The price of the Company's Ordinary Shares may be volatile and may decrease, and Shareholders may not be able to sell Ordinary Shares at a favourable price after the Firm Placing and the Placing and Open Offer.

The public trading market price of Ordinary Shares may decline below the Offer Price. Should that occur, relevant Shareholders will suffer an immediate unrealised loss as a result. Moreover Shareholders may not be able to sell their New Ordinary Shares at a price equal to or greater than the acquisition price for those shares.

The market value of the Ordinary Shares will fluctuate and may not always reflect the underlying asset value or the prospects of the Group. The price of the Ordinary Shares may fall in response to market appraisal of the Group's current strategy or if the Group's operating results or prospects, from time to time, are below the prior expectations of market analysts and investors. In addition, stock markets have, from time to time (including recently), experienced significant price and volume fluctuations that affect the market price of the Ordinary Shares. A number of factors outside the control of the Group may impact on its performance and the price of the Ordinary Shares. The factors which may affect the Company's share price include (but are not limited to):

·         the Group’s expected and actual operating performance and the performance of other companies in the markets in which the Group operates;
·         speculation about the Group’s business, about mergers or acquisitions involving the Group or major divestments by the Group in the press, media or investment community;
·         legislative and regulatory developments which are relevant to the Group’s business;
·         speculation regarding the intentions of the Company’s major Shareholders or significant sales of shares by such Shareholders;
·         the publication of credit ratings by rating agencies and of research reports by analysts; and

·         general market conditions.

The Company has no current plans for a subsequent offering of Ordinary Shares within 12 months from the date of this document. However, it is possible that the Company may decide to offer additional Ordinary Shares in the future. An additional offering or a significant sale of Ordinary Shares by any of the Company’s major Shareholders could have an adverse effect on the market price of the outstanding Ordinary Shares.

(ii)    Punch has suspended its dividend payments and dividend payments may not be resumed in the future

The Board did not pay a final dividend for the 2008 financial year or an interim dividend for the 2009 interim period, and does not anticipate paying or declaring any dividends for the remainder of the 2009 financial year. The Board considers it prudent to retain cash and further strengthen the balance sheet ahead of returning cash to Shareholders.

In addition, under UK company law, a company can only pay cash dividends to the extent that it has distributable reserves and cash available for this purpose. As a holding company, Punch's ability to pay dividends in the future is affected by a number of factors, principally its ability to receive sufficient dividends from subsidiaries. The payment of dividends to Punch by its subsidiaries is, in turn, subject to restrictions, including certain regulatory requirements, the existence of sufficient distributable reserves and cash in Punch's subsidiaries and compliance with certain covenants and financial performance tests under the terms of the Group's securitisations. These restrictions could limit Punch's ability to fund other operations or to pay a dividend to holders of Ordinary Shares.

In addition, the Convertible Bonds contain a covenant restricting Punch from paying any dividend or making any other distribution in respect of its share capital or redeeming or otherwise acquiring any of its share capital, if Punch (Redwood Jerseyco) Limited, the issuer of the Convertible Bonds, or Punch fails to pay any amounts when due, and for so long as such amounts remain outstanding, under the Convertible Bonds or associated governing documents. If any such failure were to occur, among other things, Punch would be unable to pay dividends or make other distributions on its Ordinary Shares to Shareholders.

(iii)    Shareholders will experience dilution in their ownership of the Company

Regardless of whether a Qualifying Shareholder takes up his entitlements under the Open Offer, the effect of the Firm Placing will be a reduction of his proportionate ownership and voting interests in Punch (unless he participates in the Firm Placing on a pro rata basis).

Shareholders will experience greater dilution in their ownership of and voting interest in the Company to the extent they do not subscribe in full for their Open Offer Entitlement to New Ordinary Shares in the Open Offer. Those Shareholders in the United States and the Excluded Territories, subject to certain exceptions, will in any event not be able to participate in the Open Offer. 

(iv)    Shareholders may have limited recourse against the Group's independent auditors

The auditors' reports relating to the Company's financial statements include language limiting the auditors' scope of responsibility in relation to such reports and the financial statements to which they relate. Such language may be intended to (and may be interpreted to) disclaim liability to acquirers of the New Ordinary Shares, even if such acquirers were members of the Company on the date such auditors' reports were delivered. The SEC would not permit such limiting language to be included in a registration statement or a prospectus used in connection with an offering of securities registered under the US Securities Act, or in a report filed under the Exchange Act. If a court in the United States (or any other jurisdiction) were to give effect to the language quoted above, investors in the Firm Placing and/or the Placing or the Open Offer may have only limited recourse against the independent auditors based on their reports or the financial statements to which they relate.

(v)    Overseas Shareholders may have only limited ability in bringing actions or enforcing judgments against Punch or the Directors

The ability of an Overseas Shareholder to bring an action against Punch may be limited under law. Punch is a public limited company incorporated in England and Wales. The rights of holders of Ordinary Shares are governed by English law and by Punch's Memorandum and Articles of Association. These rights differ from the rights of Shareholders in typical US corporations and some other non-UK corporations. An Overseas Shareholder may not be able to enforce a judgment against some or all of the Directors and executive officers of Punch. A majority of the Directors are residents of the United Kingdom. Consequently, it may not be possible for an Overseas Shareholder to effect service of process upon the Directors and executive officers within the Overseas Shareholder's country of residence or to enforce against the Directors or executive officers of Punch judgments of courts of the Overseas Shareholder's country of residence based on civil liabilities under that country's securities laws. An Overseas Shareholder may not be able to enforce any judgments in civil and commercial matters or any judgments under the securities laws of countries other than the United Kingdom against the Directors or executive officers of Punch who are residents of the United Kingdom or countries other than those in which judgment is made. In addition, English or other courts may not impose civil liability on the Directors or executive officers in any original action based solely on foreign securities laws brought against Punch or its Directors or executive officers in a court of competent jurisdiction in England or other countries.

APPENDIX II

Overview of business performance and OPERATING AND FINANCIAL REVIEW

Current trading and prospects

Operating and financial review

The following discussion of the Group's financial condition and results of operations should be read in conjunction with the Company's Annual Reports and Financial Statements and the 2009 Interim Results. The following discussion contains forward-looking statements that are based on assumptions about the Group's future business. The Group's actual results could differ materially from those discussed in these forward-looking statements. For further information regarding the factors that may affect the Group's business, please see the risk factors set out above in this announcement, and the ''Note regarding forward-looking statements'' set out at the end of the summary section of this announcement.

Overview

Business overview

Punch is a leading operator of leased and managed pubs in the United Kingdom. As at 7 March 2009, the Group's estate comprised 8,384 pubs located across the United Kingdom, of which 7,486 were operated under lease and tenancy agreements with independent retailers (the ''leased estate'') and 898 were operated under the direct management of the Group (the ''managed estate''). As at 30 May 2009, the Group had 8,165 pubs in total, with 7,297 in the leased estate and 868 in the managed estate. The business of the Group is primarily the leasing of pubs, the provision of goods and services to retailers who operate pubs leased from the Group and the sale of drink and food to customers of pubs managed by the Group.

Within the leased estate, the Group derives revenue from three primary sources: sales of beer and other drink products to retailers; rent from retailers under lease or tenancy agreements; and profitsharing arrangements with retailers for income from leisure machines. Within the managed estate, the Group derives revenue primarily from the sale of drink and food to members of the public and income from leisure machines. During the 2008 financial year, the Group generated revenue of £1.56 billion.

Industry overview

The Group operates in the UK pub industry, which itself is part of the wider drinking-out and eating-out market, which also includes restaurants, social clubs, nightclubs and fast food outlets. The UK pub industry consists of some 57,000 licensed public houses, and going to pubs, clubs and bars continues to be one of the most popular leisure activities in the United Kingdom. In 2008, the annual sales of the UK pub industry were estimated to be approximately £26 billion.

The UK pub industry can be broadly categorised into three business models: leased or tenanted pubs; managed pubs; and individual, independently owned pubs.

·         Leased or tenanted pubs. Leased or tenanted pubs are run and managed by a retailer who does not own the premises, but who operates the pub under a lease or tenancy agreement. The retailer is generally responsible for the maintenance of the pub and is normally contracted to purchase the majority of drink products for resale from the owner of the pub. Leased or tenanted pubs tend to have a lower average weekly turnover than managed pubs and have historically been more dependent than managed pubs on the sale of draught beer. Leased or tenanted pubs comprise approximately 53 per cent. of all pubs operating in the United Kingdom. In this document, unless the context otherwise requires, references to leased pubs also include tenanted pubs.
·         Managed pubs. Managed pubs are generally owned by a pub company or brewer. The owner of a managed pub employs all of the pub staff, is responsible for the operating expenses of the pub and generally prescribes the entire range of products offered by the pub. Managed pubs tend to be larger and have a higher average weekly turnover than leased or tenanted pubs and individual, independently owned pubs. Managed pubs comprise approximately 16 per cent. of all pubs operating in the United Kingdom.
·         Individual pubs. Individual pubs (sometimes known as free houses) are independently owned and operated by private individuals. The owner has full operational and managerial control of the pub and is free to decide which products to sell. Individual, independently owned pubs comprise approximately 31 per cent. of all pubs operating in the United Kingdom.

Basis of presentation

Financial year variation

The Group's accounts are drawn up for a whole number of weeks in accordance with common practice in the pub industry. Financial years are therefore generally 52 weeks long, with the occasional 53-week period to maintain the year end around the 24 August accounting reference date. The financial periods reviewed in this section are the same as those referred to in the Annual Reports and Financial Statements. These periods are not of uniform duration for successive years, comprising a 53-week period ended 23 August 2008, and 52-week periods ended 18 August 2007 and 19 August 2006, respectively, and 28-week periods ended 7 March 2009 and 1 March 2008, respectively. Consequently, the results for the 53-week period ended 23 August 2008 were positively impacted by an additional week's trading relative to the previous year. 

The discussion in this section does not reflect the more recent matters discussed in the Company's interim management statement, which should be read together with this section. 

In addition, the Group's financial results are impacted by the financial year being split into two unequal periods, with the first half being 28 weeks long and the second half being 24 weeks long. Furthermore, the Group's financial results have, historically, been subject to seasonal trends between the first and the second half of the financial year. Traditionally, the summer months in the second half of the financial year see higher revenue and profitability, as a result of the more favourable weather conditions.

The Group's financial statements for each of the 2007 and 2006 financial years reflect the trading of certain businesses acquired or disposed of during these periods from the date of each acquisition, or until the date of each disposal, as the case may be. Accordingly, given the significant changes in the scale of the estate and the different operational characteristics of the estates acquired or disposed of, the Group's operating results for each of the periods presented are not directly comparable. For further information on such acquisitions and disposals, see the section headed ''Factors affecting the Group's results of operations and financial position - Acquisitions, disposals, conversions and closures'' below.

Business segmentation

The Group's primary reporting format is business segments, which are divided into two core trading segments that are managed separately: a leased estate and a managed estate. The results of both segments have been impacted by the conversion of managed pubs into leased pubs, the overall reduction in the estate, the slowdown in consumer spending, the decrease in beer consumption, the smoking ban and rising costs. The Group operates solely in the United Kingdom and therefore has only one geographical segment. The Group has a 50 per cent. ownership interest in Matthew Clark (Holdings) Limited, the holding company of the Matthew Clark drinks wholesaler and distributor business pursuant to a joint venture with Constellation Europe, a division of Constellation Brands, Inc.

Factors affecting the Group's results of operations and financial position

The results of operations and financial position of the Group have been influenced during the periods under review by various factors, including those summarised below, and the Group expects that these factors will continue to have an impact on its results of operations and financial position in the future. For further information on some of the risks which may affect the Group's results of operations and financial position, see the risk factors set out above in this announcement.

Acquisitions, disposals, conversions and closures

During the periods under review, the Group has made several significant acquisitions and disposals, has converted a number of pubs from managed to leased, and has closed a number of pubs. Such acquisitions, disposals, conversions and closures have affected its results of operations.

Punch actively manages the composition of its estate by pursuing a strategy of acquiring highquality pubs and disposing of less sustainable and less profitable pubs. As part of this strategy, and to increase cash flow in order to reduce debt levels, at the beginning of its 2009 financial year the Group accelerated its ongoing divestment programme to dispose of its underperforming or noncore pubs. In addition, the Group has recently made certain strategic disposals. During the 2008 financial year, the Company identified approximately 500 leased and tenanted pubs that were unlikely to generate long-term sustainable growth and were suitable for sale or conversion for alternative use. In the first 35 weeks of the 2009 financial year to 25 April 2009, when the results for the 2009 interim period were published, the Group disposed of 161 pubs, largely from the noncore portfolio together with other assets, realising proceeds of £91 million. In the period between the publication of the results for the 2009 interim period and 30 May 2009, the Group has disposed of a further 150 pubs together with other assets, realising £80 million in proceeds. The Company expects to continue divesting pubs as part of its ongoing portfolio management and in order to generate additional cash flow.

During the 2008 financial year, the Group acquired 20 pubs and disposed of 39 pubs, resulting in a financial year end estate of 8,424 pubs comprising 7,560 leased pubs and 864 managed pubs. During the 2007 financial year, the Group acquired the entire share capital of Broomco (3708) Limited, the holding company of the Mill House group, which operated a managed estate of 82 pubs at the date of acquisition. In addition to the acquisition of the Mill House group, the Group acquired a further 96 individual pubs, disposed of 986 pubs and converted 563 pubs from managed to leased during the period. As at 18 August 2007, the Group's estate consisted of 8,448 pubs, of which 7,561 were leased and 887 were managed. During the 2007 financial year, the Group also completed the acquisition of 50 per cent. of Matthew Clark (Holdings) Limited, the holding company of the Matthew Clark group, a leading UK drinks wholesaler and distributor.

During the 2006 financial year, the Group acquired the entire share capital of Spirit Group Holdings Limited, which operated 1,830 directly managed pubs at the date of acquisition. The Group subsequently sold 351 of the pubs acquired in the Spirit acquisition and began the conversion of a number of Spirit Group pubs from managed to leased, with 74 pubs being converted in the period. Within the leased estate, the Group acquired 96 individual pubs and disposed of 551 pubs during the 2006 financial year. As at 19 August 2006, the Group's estate consisted of 9,256 pubs, of which 7,846 were leased and 1,410 were managed.

From time to time the Group decides to close underperforming pubs prior to sale as part of its ongoing divestment programme. In addition, pubs may return to the Group from retailers as a result of business failures or other reasons. Where possible, the pub will be re-let immediately to another lessee or under a tenancy-at-will agreement. Where this is not possible, the pub may remain closed until a new retailer is found to operate the pub. Closed pubs constituted approximately 5 per cent. of the Group's leased estate as at 7 March 2009, as compared to approximately 3 per cent. as at 23 August 2008. Pubs that are sold to another owner may remain operating as pubs or may be adapted to an alternative use. The rate of pubs being returned to the Group has increased recently due to the difficult economic environment.

Competition

Punch operates in highly competitive markets and therefore its financial performance is affected by the behaviour and success of its competitors. Punch's competition includes any provider of leisure facilities or services, ranging from other pub companies to supermarkets and home entertainment suppliers. For example, the on-trade beer market in the United Kingdom is being impacted by the pricing policies of the large supermarket groups, with the off-trade accounting for a greater proportion of UK beer sales than in the past. In addition, the increase in home internet usage and declining prices for large-screen and high-definition televisions and satellite television services are contributing to increases in the off-trade business. Improvements in food offerings by competing pubs also may negatively impact the Group's ability to attract customers. Continued consolidation among pub operators could also increase the size of the Group's competitors, who may have greater financial and operational resources than the Group.

Changing consumer habits

The Group's financial results can be materially impacted by any material change in consumer habits within the United Kingdom. Examples of changes in consumer habits that have impacted and that the Group expects will continue to impact the Group's financial performance include the long-term shift in beer consumption from the on-trade to the off-trade, the continuing impact of the smoking ban, the long-term growth in eating out of the home, an increasing emphasis on healthier lifestyles (and the corresponding reduction in alcohol consumption) and the increasing breadth of choice of leisure amenities in the United Kingdom. Beer sales (by volume) have been in decline for a number of years and in recent years the rate of decline has increased with a disproportionate impact on the on-trade market. For instance, while there was a 5.3 per cent. annual volume decrease in total beer sales in the United Kingdom in 2008, over the same period on-trade sales decreased by 9.3 per cent. Some of these trends have been reinforced as a result of the smoking ban introduced in Scotland in 2006 and in England and Wales in 2007. Changes in consumer tastes and demographic trends may also affect the appeal of the Group's pubs to consumers, especially if the Group does not anticipate, identify and respond to such changes by evolving its brands, formats and offerings adequately and sufficiently promptly, which could have a negative impact on the Group's financial performance.

Economic climate

The Group's business is subject to general economic conditions in the United Kingdom. In particular, the revenue and results of the Group are affected by the level of consumer confidence and expenditure on leisure activities. Economic factors such as rising interest rates, declining wages, higher unemployment, tax increases, lack of consumer credit and falling house prices could all adversely affect the level of consumer confidence, which can have a significant effect on the level of spending by the customers of Punch's pubs. 

The present and anticipated future economic difficulties in the UK economy have resulted in lower consumer expenditure and therefore lower revenues and net income for the Group. Beginning in the autumn of 2007, there has been a slowdown in consumer spending which has been exacerbated by the turmoil in the banking and other sectors and rises in the cost of food and fuel. This has coincided with changing consumer trends following the introduction of the smoking ban. 

Since September 2008, the economic environment has worsened further and the wider recessionary economic conditions have significantly reduced consumer confidence and adversely affected the level of disposable income available for leisure activities. As a result, many of the Group's retailers have experienced difficulties, and, recognising the importance for the Group of its pubs remaining in business during these difficult times, the Group has increased its support to retailers. The Board anticipates that consumer demand levels are unlikely to improve in the near term and, in response, Group management has focused on the four key objectives of strengthening operational management, stabilising operating performance, increasing cash flow generation, and reducing debt. The Group's ''Turnaround Division'' and its ''Operational Excellence'' programme are examples of how the Group is implementing this strategy.

Regulation and the BESC report

The Group's operations are directly subject to and indirectly affected by extensive regulation, including in relation to employment, minimum wages, pub licensing, alcoholic drinks control, leisure (gaming) machines, competition, taxation, health and safety, sanitation, the environment, data protection and access for the disabled. These laws and regulations impose a significant burden on the Group and its retailers, each of which must devote significant time and expense to compliance with these requirements. In addition, some laws and regulations have an indirect effect on the Group's business, such as laws on drink-driving, excessive drinking and youth drinking, by reducing demand.

The Group's operations have particularly been affected by the smoking ban that was introduced on 26 March 2006 in Scotland, on 1 April 2007 in Wales and on 1 July 2007 in England. Following the ban on smoking in public places, the rate of decline in on-trade beer sales has generally increased, apart from a temporary stabilisation during the summer of 2008.

Further regulatory changes could adversely affect the Group's results of operations, including through reduced demand or higher costs. More restrictive regulations could lead to increasing prices to consumers, which in turn may adversely affect demand and therefore revenues and profitability. For example, as a result of the UK government's duty escalator, which commenced from 23 April 2009, duties on alcohol will automatically rise each year for the next five years by 2 per cent. above the retail prices index.

The Business and Enterprise Select Committee (''BESC'') of the House of Commons has recently conducted a parliamentary inquiry into pub companies. In its report to the House of Commons published on 13 May 2009, the BESC recommended that the Secretary of State urgently refer the sector to the Competition Commission for an urgent market investigation. The Government is expected to respond to the BESC report within two months.

The BESC also made other recommendations, including the removal of the tie on AWP machines, a ban on restrictive covenants on disposal and measures to prevent inequalities of bargaining power between pub operators and lessees and to improve the transparency of rent assessments.

The Association of Licensed Multiple Retailers (''ALMR'') wrote to the Chairman of the BESC on 10 June, noting that it was working with a number of industry stakeholders (including Punch Taverns) to address the issues raised in the BESC report, by negotiating changes in industry practice through a formal mediation process with the intention of introducing legally binding changes in the relationship between pub companies and their lessees. ALMR commented that, whilst this process would take time, it believed it should be possible to reach agreement within six months.

Supplier pricing

The Group's results are affected by the cost of supplies purchased from third parties. Some costs, such as the Group's energy supplies, are linked to market movements outside of the control of the Group. Increased costs of supplies can directly have a negative impact on the Group's managed estate, and can negatively impact the Group's leased estate indirectly by reducing the amount received from retailers in rent and for the supply of drink products. Due to significant energy and food cost price inflation experienced during 2008, supply prices have increased across the industry, and the Group is not always able to, or does not always choose to, pass along price increases to pub retailers and customers. However, over 84 per cent. of the beer supplied to the Group is currently purchased under long-term supply agreements with key suppliers, which has helped mitigate price inflation in wholesale beer purchases, although even these contracts are often subject to price review. The Group also obtains predictability in relation to energy prices by entering into energy supply contracts up to one year in advance.

Staff costs

Staff costs are a significant element of the Group's operating costs, particularly with respect to its managed pubs segment. Minimum wage legislation largely fixes the base compensation level. Increases in staff costs, whether due to market conditions or increases in mandatory minimum wages or benefits, can have a material effect on the Group's results of operations. Increases in employee turnover can also result in increased recruiting expenses and reduced efficiency through lost management time.

Impairment and exceptional charges

In order to provide a trend measure of operating performance, operating profit is presented excluding items which the Company considers will distort comparability, whether due to their significant non-recurring nature or as a result of specific accounting treatments. Exceptional charges, including impairments, have recently had a significant impact on the Group's results of operations. In the 2008 financial year, the Group recognised exceptional charges of £250.7 million net of tax effect, including impairment losses on property, plant and equipment and operating leases of £294.7 million and negative movement in the fair value of interest rate swaps of £31.1 million, offset by a positive tax effect of £91.8 million. In the 2007 and 2006 financial years, the Group recognised exceptional gains, net of tax effect, of £54.4 million and £52.0 million, respectively, largely due to positive movements in the fair value of interest rate swaps. Due to the significant fluctuations in earnings resulting from such exceptional items, the Group's earnings and earnings per share may vary materially from year to year independently of the Group's underlying operating performance.

Financial and operating covenants

The Group is highly leveraged, and, in keeping with securitisations of their type, the documents governing the terms of the Group's securitisations contain financial and operating covenants as well as performance tests which impose restrictions on payments and distributions by certain members of the Group if those performance tests are not met. These covenants and performance tests are discussed briefly below.

The securitisations contain financial covenants which test the performance of the relevant securitisation. Those financial covenants include: a ratio of EBITDA to debt service; a minimum net worth covenant (in the case of two of the securitisations) and a loan to value ratio (in the case of one of the securitisations). If any of such covenants were breached, due for example to a decline in the Group's operating profit resulting from economic conditions, it may result in an event of default in a securitisation which, if not cured or waived, could result in the enforcement of security within a securitisation and/or the appointment of an administrative receiver to the securitisation group and/or the acceleration of all or a substantial portion of the Group's debt.

The obligation to repay the notes issued under each of the Group's securitisations is limited in recourse to the assets of the companies within the relevant securitisation group. Accordingly, as is common for transactions of this type, there are no cross default clauses in the securitisations providing that an event of default is triggered under the securitisations as a result of a default in, or acceleration of, the Group's debt outside the relevant securitisation group (including a default under another securitisation group's debt or a payment default under the Convertible Bonds). By contrast, the Convertible Bonds contain a cross default clause which is triggered if any of the debt of the Group is not paid when due or if any of the debt in the Group is accelerated, subject in each case to a de minimis of £2,500,000. A payment default or acceleration of the debt in the Group's securitisations would be caught by this clause.

In the longer term, a default in the securitisations could therefore lead to an acceleration of the Convertible Bonds. This, in turn, would have an adverse effect on the Group's financial position. 

The Group's securitisations also contain restrictive operating covenants. These covenants restrict, among other things, the ability of certain members of the Group (including the main operating companies within the Group's securitisations) to conduct acquisitions, create security interests, sell assets, incur capital expenditure and raise capital.

In accordance with the terms of the ''restricted payment conditions'' imposed upon certain members of the Group, if the performance tests in those ''restricted payment conditions'' are not met (which may arise, for example, due to a decrease in the Group's operating profit or a significant decline in pub values), the relevant securitisation would be unable to make payments (including dividends and loans) to members of the Group outside the securitisation group. Almost the entire Group's operating profit and EBITDA is generated within the securitisation structures. If the performance tests to be able to make payments outside of the securitisation group are no met, as is currently the case under the Spirit Debenture, it reduces the Group's ability to satisfy financial obligations outside of the relevant securitisation group. The Group's two other securitisations (the Punch A Securitisation and the Punch B Securitisation) currently meet the performance tests for such payments. Punch does not expect that such performance tests will continue to be met in the next financial year, but Punch does not expect this to affect the Group's ability to reduce debt levels within the respective securitisations.

Seasonality

Attendance levels at the Group's pubs are affected by the weather and by the timing of major sporting events. Persistent rain or other inclement weather, especially during the summer months or over the Christmas period, which are peak trading times, can have a negative effect on revenue generated by the Group's pubs and, in turn, could have a negative effect on the results of the Group's operations. Major sporting events, especially those in which British teams are successful, can also impact revenue. The absence of major events, or the poor performance of a British team, could have a negative impact on the Group's results. The seasonality of the pub industry results in variable demand and, therefore, the Group's revenue and operating results will fluctuate from period to period.

Description of key items in the income statements

The following is a brief description of the composition of the Group's key income statement line items.

·          Revenue. Group revenue is derived mainly from the sale of drink products and food, rental income and machine income.
  • Drink products. Drink sales comprised the majority of Group revenue for each period under review. Drink products include beer, cider, wine, other alcoholic beverages and soft drinks.

In the Group's leased estate, drink products are sold to the retailers who operate the Group's pubs under lease or tenancy agreements. While the majority of drink sales are sold to retailers in accordance with the tie arrangements in the relevant lease or tenancy agreement, retailers also purchase non-tied drink products from Punch on a discretionary basis. Drink sales are recorded net of any discounts, sales-based incentive schemes (such as volume rebates) and returns. Revenue is recognised on despatch of goods to the retailer and adjusted to reflect any returns.

In the Group's managed estate, the Group recognises the proceeds from the sale of drink products to customers at the time of such sale.

  • Food. In the Group's leased estate, food products are largely purchased by the retailers directly from their various suppliers, and income from food sales in the leased estate is therefore negligible. In the Group's managed estate, the Group recognises the proceeds from the sale of food to customers at the time of such sale.

  • Rental income. In the Group's leased estate, rental income is paid to the Group in advance in accordance with the relevant lease or tenancy agreement. Rent is generally payable weekly, fortnightly or, in the case of certain leases, monthly. The rent is agreed at the outset of each lease or tenancy agreement and, in the case of new leases and tenancies, is based on its open market value. While legacy leases and tenancy agreements have generally included upward-only rent review clauses at specified intervals during the term, in practice these are not always enforced by the Company. Rents are also subject to reductions where the business relationship manager agrees hat local or market factors have had a material impact on the retailer's ability to sustain an appropriate level of return, and the practice of allowing rent concessions for retailers has become more prevalent in the current market. In the majority of new leases and tenancy agreements, in addition to rent reviews at specified intervals, rent is also annually indexed by reference to the retail prices index, which for the months of March and April 2009 was reported to be negative with respect to March and April 2008, respectively. Capital investment in a particular pub by the Group generally results in an increase in the negotiated rent for that pub. Since rent decisions are based upon the potential retail trading of a given pub, they are indirectly driven by likely sales of beer, other drink products, food, leisure machine income and other sources of income, including accommodation. Rental income is calculated daily over the term of the lease or tenancy agreement.

  • Machine income. In the Group's leased estate, machine income is derived from two sources. As at 7 March 2009, income was received from approximately 4,600 (approximately 61 per cent.) of the Group's leased pubs under profit sharing arrangements included in or ancillary to a lease or tenancy agreement. Of such agreements, the vast majority of retailers share the leisure machine income 50:50 with the Group. To a lesser extent, income is also generated from standalone agreements with some of the Group's leisure machine suppliers. Under these agreements, a small fee is received from the machine suppliers in respect of any of their machines which have been placed in a particular pub. Income is recognised as collected by the Group's agents on a weekly basis.

  • In the Group's managed estate, the Group recognises the revenue from the net retained leisure machine income at the time the transaction occurs.

  • Gross margin. Gross margin is broken down into the same categories as Group revenue.
  • Drink products. The Group purchases beer and other drink products from various suppliers, in particular Carlsberg UK, Molson, Coors (UK), InBev UK, Diageo and Scottish & Newcastle UK. Gross margin derived from beer and other drink products is affected by changes in the wholesale prices at which they are bought from brewers and suppliers and the corresponding changes in prices at which they are sold on to retailers, in the case of the Group's leased estate, and customers, in the case of the Group's managed estate.

  • Food. In the Group's managed estate, food ingredients and food products are purchased from various suppliers. Gross margin derived from food sales is affected by the changes in prices at which food is bought, the corresponding changes in prices at which they are sold on to customers, and the mix impact of menu changes.

  • Rental and machine income. As there are negligible costs associated with these sources of revenue, substantially all of the Group's rental and machine income translates into gross margin.

  • Operating costs (before depreciation, amortisation and exceptional items). In the leased estate, operating costs primarily comprise retailer support costs, head lease rent, pub repairs, bad debts in respect of rent or drink sales, costs of dispense monitoring systems and management costs for closed pubs. In the managed estate, approximately half of the operating costs relate to staffing costs, with the remaining costs primarily comprised of rents payable, support costs, utility bills, rates charges and pub repair and maintenance expenditures.

Salaries are charged to the income statement when due and in accordance with employee contracts and obligations.

The cost of pub repairs substantially relates to pubs where the Group is responsible for all repairs and decorations required, which are usually managed pubs and tenanted pubs (including those operating under a tenancy-at-will agreement), since leased pubs generally operate under full repairing leases. Tenanted pubs comprised approximately 18 per cent. Of the total estate by number of pubs as at 7 March 2009.

As at 7 March 2009, approximately 89 per cent. of the Group's pubs were owned in freehold, with the remainder being leased under operating or finance leases. The Group either incurred a head lease in respect of leased premises or was potentially liable for a peppercorn rent.

The Group makes provisions to offset the potential cost of bad debts. These provisions are reviewed regularly through the monitoring of all overdue amounts. The majority of retailers pay for rent and goods by direct debit. Overdue debts are actively managed through a ''cash with order'' process in which the Group holds a deposit from many of its retailers which serves to mitigate, in part, the risk of irrecoverable debt.

Operating costs also include the cost of beer dispense monitoring systems, which, as at 7 March 2009, were installed in approximately 7,000 (93 per cent.) of the Group's leased pubs, and container-tagging. These systems provide the Group with a means of monitoring retailer compliance with tie arrangements. The Group also incurs management service costs for closed pubs or pubs operated under tenancy-at-will agreements.

·                     Share of post-tax profit from joint ventures. The Group records in its income statement its share of the post-tax profits from joint ventures.
·                     Depreciation and amortisation (before exceptional items). The Group’s estate is comprised mainly of freehold and long leasehold properties. Landlord’s fixtures and fittings include removable items, which are generally regarded as within landlord ownership, and are depreciated over a term of between five years and 15 years. Property, plant and equipment assets are carried at cost or deemed cost less accumulated depreciation and any recognised impairment in value. Depreciation is provided to write off the cost of the property, plant and equipment, less estimated residual values, by equal annual instalments over a period of 50 years or the life of the lease if shorter. Freehold land is not depreciated. An annual assessment of residual values is performed and there is no depreciable amount if residual values are the same as, or more than, book value. Residual values are based on the estimated amount which could currently be obtained from disposal of the asset, net of disposal costs, if the asset were already of the age and condition it is expected to be in at the end of its useful economic life. Goodwill carried in the balance sheet is not amortised. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
·                     Operating profit (before exceptional items). Operating profit is revenue less operating costs, share of post-tax profit from joint ventures and after charging depreciation and amortisation. All income and expense lines are before exceptional items.
·                     Net finance costs (before exceptional items). Finance income mainly relates to bank interest earned on deposits and net pension finance income. Finance costs relate to interest charged on loans, financial leases and borrowings.
·                     Profit (loss) on sale of non-current assets. The majority of profit on the sale of non-current assets relates to the disposal of pubs and other property assets. As part of the overall estate management process the Group pursues a programme of identifying properties that are likely to be more valuable if used other than as pubs. The Group earns profit on such properties by developing or selling them to parties better suited to operating these properties under the identified alternative use. The Group also sells pubs which continue to be operated as pubs. Any profit or loss is measured against the book value of the property in its current use.
·                     Tax (before exceptional items). Tax represents the aggregate amount included in the determination of profit or loss for the period in respect of current and deferred tax. Current tax is the amount of income taxes payable in respect of the taxable profit for a period. Deferred tax represents the amount of income tax payable in a future period in respect of taxable temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes, and unused tax losses. The Group pays tax on its income at the statutory 28 per cent. rate, subject to various adjustments. The effective taxation charge of 25.7 per cent. applied in the 2009 interim results, before profit on sale of non-current assets, exceptional items and share of post-tax earnings from joint ventures, reflects the estimated tax rate for the current financial year. The effective rate of taxation for the comparative period was 28.7 per cent. The effective taxation charge in the 2007 and 2006 financial years was significantly lower due to the deferred taxation indexation allowance being credited to the pre-exceptional tax line. Following a change in accounting treatment in the 2009 financial year (with a retrospective adjustment being reflected in the 2008 financial year), the impact on the tax line from indexation allowances is now reflected within the exceptional items.
·                     Exceptional items. The Group has recorded certain non-recurring and exceptional income and expenses as exceptional items. The Company believes that these items are not indicative of its underlying performance. The more significant exceptional items incurred in recent years are as follows:
·                     Pub impairment. Pub impairments of £146.6 million were recognised in the financial statements for the 2009 interim period, and pub impairments of £294.7 million were recognised for the 2008 financial year. Impairments were recognised primarily due to the reduction in trading profits experienced, given the change in consumer preferences after the introduction of the smoking ban, together with the continuing deterioration in consumer confidence and expenditure in the United Kingdom. When indicators of impairment are identified, such as a reduction in trading levels, pubs are reviewed for impairment based on each cash generating unit (‘‘CGU’’). The CGUs are individual pubs. The carrying value of these individual pubs is compared to the recoverable amount of the CGUs, which is based predominantly on value-in-use.
·                     Movement in fair value of interest rate swaps. Represents the movement in the fair value of interest rate swaps which do not qualify for hedge accounting. While the Group’s interest rate swaps were at the date of acquisition or inception considered to be effective in matching the amortising profile of existing or planned floating rate borrowings, they do not meet the definition of an effective hedge due to the relative size of the mark-to-market difference of the swap at the date of acquisition or inception. As at 7 March 2009, the interest rate swaps in relation to the Punch A Securitisation and the Punch B Securitisation were deemed to be effective swaps for the purpose of qualifying for hedge accounting, whereas the swaps relating to the Spirit Debenture were deemed ineffective for the purpose of hedge accounting. Changes in future interest rate yield curves or the impact of repaying securitised borrowings ahead of schedule may result in the Punch A Securitisation and the Punch B Securitisation swaps being deemed ineffective swaps for the purpose of hedge accounting. This could contribute to volatility in the income statement in future periods.
·                     Property liabilities. Represents the provision for onerous leases following their reversion to the Group together with changes in the expectation of future losses on onerous leasehold properties.
·                     Finance income / costs. Represents the profit or loss relating to one-off refinancing activity. Ongoing changes to interest income or expense is reflected in the pre-exceptional profit before tax.
·                     Redundancy and integration costs. Following significant acquisition, disposal and managed-toleased conversion programmes there has been a need to adjust the size of the Group’s operational and support functions to meet the changing shape and requirements of the estate going forward. As a consequence of these changes and the strategy to reduce ongoing costs, the Group has incurred a number of one-off restructuring costs.
·                     Taxation. Represents the tax effect of exceptional items together with the impact of finalising prior year tax matters with HMRC and, from the 2008 financial year onwards, the impact of indexation allowance credits or charges on the tax-based cost of properties.

  Summary historical financial information

The following table presents information derived from the unaudited Group income statement for each of the 28 weeks ended 7 March 2009 and 1 March 2008, together with information derived from the audited Group income statement for the 2008, 2007 and 2006 financial years.

 
28 weeks to 7 March 2009
28 weeks to 1 March 20082
53 weeks to 23 August 20082
52 weeks to 18 August 2007
52 weeks to 19 August 2006
 
£m
£m
£m
£m
£m
Revenue
767.9
813.5
1,560.6
1,704.9
1,546.1
Operating costs before depreciation and amortisation
(494.1)
(492.4)
(940.3)
(1,042.9)
(939.8)
Share of post‑tax profit from joint venture
1.4
2.1
3.1
1.6
EBITDA1
275.2
323.2
623.4
663.6
606.3
Depreciation and amortisation
(33.8)
(33.2)
(62.5)
(56.5)
(46.1)
Operating profit1
241.4
290.0
560.9
607.1
560.2
Profit on sale of non‑current assets1
2.2
0.4
3.0
1.4
Net finance costs1
(159.1)
(159.2)
(299.0)
(328.4)
(312.0)
Profit before tax1
82.3
133.0
262.3
281.7
249.6
Taxation1
(20.8)
(36.9)
(76.3)
(57.7)
(54.8)
Profit after tax1
61.5
96.1
186.0
224.0
194.8
Exceptional items
(183.9)
(9.1)
(250.7)
54.4
52.0
Earnings per share:
 
 
 
 
 
Basic adjusted (pence) 3
23.1
36.1
69.9
84.4
74.9


1    Before exceptional items, which include, for the 28 weeks ended 7 March 2009, £146.6 million of impairment charges and a £68.4 million charge for the mark-to-market of certain interest rate swaps, and, for the 53 weeks ended 23 August 2008, £294.7 million of impairment charges and a £31.1 million charge for the mark-to-market of certain interest rate swaps. Other exceptional items for these and other periods are discussed below.  

2    Restated to reflect the change in accounting treatment applied in the 2009 financial year on the indexation allowance applied to the tax-based cost of properties.

3    Earnings adjusted for the impact of exceptional items.





  Segmental analysis

The following table represents selected unaudited and audited financial data of the Group by segment for the 28 weeks ended 7 March 2009 and 1 March 2008 together with information derived from the audited group income statement for the 2008, 2007 and 2006 financial years. For further segment financial information, see the notes to the Group's Financial Statements.


 
28 weeks to 7 March 2009
28 weeks to 1 March 2008
53 weeks to 23 August 2008
52 weeks to 18 August 2007
52 weeks to 19 August 2006
 
£m
£m
£m
£m
£m
Revenue
 
 
 
 
 
Leased
416.2
450.8
857.9
845.1
803.3
Managed
351.7
362.7
702.7
859.8
742.8
Joint venture
Total revenue
767.9
813.5
1,560.6
1,704.9
1,546.1
EBITDA1
 
 
 
 
 
Leased
226.7
258.5
490.1
479.2
435.7
Managed
47.1
62.6
130.2
182.8
170.6
Joint venture
1.4
2.1
3.1
1.6
Total EBITDA1
275.2
323.2
623.4
663.6
606.3
Operating profit1
 
 
 
 
 
Leased
215.0
247.6
469.4
461.7
420.4
Managed
25.0
40.3
88.4
143.8
139.8
Joint venture
1.4
2.1
3.1
1.6
Total operating profit1
241.4
290.0
560.9
607.1
560.2


1    Before exceptional items, which include, for the 28 weeks ended 7 March 2009, £146.6 million of impairment charges and a £68.4 million charge for the mark-to-market of certain interest rate swaps, and, for the 53 weeks ended 23 August 2008, £294.7 million of impairment charges and a £31.1 million charge for the mark-to-market of certain interest rate swaps. Other exceptional items for these and other periods are discussed below.  

 




  Results of operations for the 28 weeks ended 7 March 2009 (the ''2009 interim period'') compared to the 28 weeks ended 1 March 2008 (the ''2008 interim period'') 

Revenue

Revenue decreased 5.6 per cent. to £767.9 million in the 2009 interim period from £813.5 million in the 2008 interim period. As discussed in more detail below, this decrease was driven primarily by a significant slowdown in consumer spending amid generally worsening economic conditions affecting the industry as a whole, resulting in decreased drink volumes, lower levels of rental income and a continuation of the decline in machine income.

Leased estate. Revenues in the leased estate decreased 7.7 per cent. to £416.2 million in the 2009 interim period from £450.8 million in the 2008 interim period. The average number of leased pubs during the 2009 interim period was 7,540 compared to 7,575 during the 2008 interim period. Revenues from the sale of drink products decreased 7.3 per cent. to £276.3 million in the 2009 interim period from £298.1 million in the 2008 interim period. On a pub by pub basis, revenues from drink products decreased to an annualised average of approximately £68,000 per pub from an annualised average of approximately £73,000 per pub in the prior period. This was largely due to an acceleration in the rate of decline in the volume of beer sales resulting from the slowdown in consumer spending.

Revenues from rents decreased 7.0 per cent. to £125.2 million in the 2009 interim period from £134.6 million in the 2008 interim period. Average annualised rental revenue per pub decreased to approximately £30,800 from approximately £33,000 in the prior period. Rental income was adversely affected by a rise in business failures and an increase in the level of retailer support provided by the Group. Aggregate retailer support, which covers both rent support and drinks pricing support, increased to an average rate of £1.6 million per month in the 2009 interim period, as compared to a rate of £0.4 million per month in the 2008 interim period.

Leisure machine and other revenues decreased 18.8 per cent. to £14.7 million in the 2009 interim period from £18.1 million in the 2008 interim period.

Managed estate. Revenues in the managed estate decreased 3.0 per cent. to £351.7 million in the 2009 interim period from £362.7 million in the 2008 interim period. The average number of managed pubs during the 2009 interim period was 876 compared to 875 for the 2008 interim period. 

Revenues from the sale of drink products decreased 2.6 per cent. to £198.6 million in the 2009 interim period from £204.0 million in the 2008 interim period. On a pub by pub basis, revenues from drink products decreased to an annualised average of approximately £421,000 per pub from an annualised average of approximately £433,000 per pub in the prior period. This was largely due to a decrease in beer sales resulting from the slowdown in consumer spending.

Revenues from food sales decreased 2.5 per cent. to £134.8 million in the 2009 interim period from £138.2 million in the 2008 interim period. On a pub by pub basis, revenues from food sales decreased to an annualised average of approximately £286,000 per pub from an annualised average of approximately £293,000 in the prior period primarily due to difficult economic conditions, increased competition in the eating out market and a reduction in selling prices to focus the estate towards more value-orientated propositions. The proportion of revenue in the managed estate derived from food sales increased to 38.3 per cent. in the 2009 interim period from 38.1 per cent. in the 2008 interim period.

The 10.7 per cent. decrease in machine and other revenues to £18.3 million in the 2009 interim period from £20.5 million in the 2008 interim period was similar to that experienced in the previous year following a decline in pure beverage-led trading volumes and increased competition from fixed-odds betting terminals.

Share of post-tax profit from joint ventures (before exceptional items)

In the 2009 interim period, the Group's share of post-tax profit from the Matthew Clark joint venture was £1.4 million, as compared to £2.1 million for the 2008 interim period, due primarily to the deterioration of general economic conditions in the United Kingdom which have had an adverse impact on the on-trade drinks market.

Depreciation and amortisation (before exceptional items)

The depreciation and amortisation charge increased 1.8 per cent. to £33.8 million for the 2009 interim period from £33.2 million for the 2008 interim period. 

Operating profit (before exceptional items)

Total operating profit decreased 16.8 per cent. to £241.4 million in the 2009 interim period from £290.0 million in the 2008 interim period, due primarily to declining beer volumes leading to reduced drinks revenues, reduced rental income and lower machines income, in addition to increased costs of providing support to retailers and significant food, energy and employee cost increases in the managed business.

Leased estate. The operating profit in the leased estate decreased 13.2 per cent. to £215.0 million in the 2009 interim period from £247.6 million in the 2008 interim period. As a result, operating margin declined by 3.3 percentage points to 51.7 per cent. in the 2009 interim period. The decrease in operating profit follows on from an 7.7 per cent. decline in revenues together with a £4 million increase in costs, largely reflecting increased management fees, bad debts, tie compliance and specific retailer support.

Managed estate. The operating profit in the managed estate decreased 38.0 per cent. to £25.0 million in the 2009 interim period from £40.3 million in the 2008 interim period. As a result, operating margin declined by 4.0 percentage points to 7.1 per cent. in the 2009 interim period. The decrease in operating profit reflects the 3.0 per cent. decline in revenues which led to a 5 per cent. reduction in gross margin as the estate was repositioned to increase its emphasis on value for consumers. Due to significant cost increases, namely staff costs and utility bills, the absolute level of pub operating and support costs increased by £3 million which, combined with the falling gross margin, resulted in the 4.0 percentage point reduction in operating margin to 7.1 per cent. 

Profit on sale of non-current assets (before exceptional items) 

The Group continued to pursue its programme of estate management and selective disposals in  the 2009 interim period, which were made largely at book value resulting in no profit on disposal compared to a £2.2 million gain in the 2008 interim period.

Net finance costs (before exceptional items)

Net finance costs remained relatively stable at £159.1 million in the 2009 interim period, reduced from £159.2 million in the 2008 interim period. Within these figures, however, finance income declined from £9.1 million to £6.3 million, reflecting the reduction in deposit interest rates and reduced surplus cash balances. Finance costs also declined slightly, reflecting the impact of debt repurchases made during the 2009 interim period.

Tax (before exceptional items)

Taxation decreased to £20.8 million in the 2009 interim period from £36.9 million in the 2008 interim period, primarily due to the reduction in underlying operating profit. Before profit on sale of non-current assets, exceptional items and share of post-tax earnings on joint ventures, the effective tax rate in the 2009 interim period was 25.7 per cent., reflecting the estimated tax rate for the 2009 financial year. The effective rate for the 2008 interim period was 28.7 per cent.

Exceptional items

The net effect, after tax, of the Group's exceptional items in the 2009 interim period was a cost of £183.9 million. The principal exceptional items were £146.6 million of impairment charges (resulting from continuing deterioration in consumer confidence and expenditure in the United Kingdom due to the deterioration of general economic conditions in the United Kingdom since August 2008, which has had an impact on the ongoing profitability of certain pubs), a £68.4 million charge for the mark-to-market of certain interest rate swaps, a £39.4 million gain on the repurchase of debt securities, a £21.9 million onerous lease provision charge and £6.4 million in reorganisation costs. Of these charges, only £7 million was an actual cash cost in the half year. The tax effect of these items, together with the tax impact of indexation and finalising a number of prior year tax matters with HMRC, gave rise to an exceptional tax credit of £20.0 million.

The net effect of the Group's exceptional items in the 2008 interim period was a cost of £9.1 million, which reflected the movement in the fair value of interest rate swaps of £19.2 million and £4.6 million of redundancy costs. The tax effect of these items together with the tax impact of indexation gave rise to an exceptional tax credit of £14.7 million.

Results of operations for the 53 weeks ended 23 August 2008 (the ''2008 financial year'') compared to the 52 weeks ended 18 August 2007 (the ''2007 financial year'') 

The 2008 financial year comprised 53 weeks, and Group's results for that year are therefore positively impacted throughout the following review by an extra week of trading relative to the prior period. Like-for-like measures, however, are shown on an equivalent 52-week basis.

Revenue

Revenue decreased 8.5 per cent. to £1.56 billion in the 2008 financial year from £1.70 billion in the 2007 financial year. This decrease resulted primarily from the reduction in the size of the managed estate, for which the average estate size in number of pubs was 27.0 per cent. below that of the prior year. In addition, revenues were negatively impacted by the introduction of the smoking ban in pubs in England and Wales and the continuing deterioration in consumer confidence and expenditure in the United Kingdom due to the deterioration of general economic conditions in the United Kingdom.

Leased estate. Revenues in the leased estate increased 1.5 per cent. to £857.9 million in the 2008 financial year from £845.1 million in the 2007 financial year. The increase in revenue, which came about despite a 3.8 per cent. fall in the average size of the estate and a fall in like-for-like revenue of 3.7 per cent., was driven primarily by an improvement in the average quality of the estate having benefited from significant estate churn in the prior year.

Revenues from the sale of drink products decreased 0.5 per cent. to £574.3 million in the 2008 financial year from £577.3 million in the 2007 financial year. On a pub by pub basis, revenues from drink products increased to an annualised average of approximately £74,000 per pub from an annualised average of approximately £73,000 per pub in the prior year, having benefited from the estate churn that took place in the prior year. Underlying drink sales declined by 5.6 per cent., however, on a like-for-like basis, in line with market trends. 

Revenues from rents increased 7.0 per cent. to £252.3 million in the 2008 financial year from £235.7 million in the 2007 financial year. The increase in average annualised rental revenue per pub to approximately £33,000 from approximately £30,000 in the prior period resulted from estate churn following the sale of less sustainable pubs in the 2007 financial year and the conversion of larger managed pubs to leased pubs, the majority of lease conversions having completed in the prior year. Underlying rental growth amounted to 2.1 per cent. on a like-for-like basis.

Machine and other revenues decreased 2.5 per cent. to £31.3 million in the 2008 financial year from £32.1 million in the 2007 financial year. This decrease was primarily due to a significant underlying reduction in machine revenues of 12.5 per cent. on a like-for-like basis, partially offset by the benefit of improved estate quality following the conversion of managed to leased pubs and the disposal of lower quality leased pubs in the prior year.

Managed estate. Revenues in the managed estate decreased 18.3 per cent. to £702.7 million in the 2008 financial year from £859.8 million in the 2007 financial year. The average number of managed pub during the 2008 financial year was 870 as compared to 1,191 for the 2007 financial year. This decrease was primarily due to the conversion of 583 pubs from managed to leased, of which 563 conversions were completed in the prior year. The full impact of these conversions was only felt during the 2008 financial year when the effect was present over the entire 53-week period. In addition, underlying revenues declined by 3.3 per cent. on a like-for-like basis following the impact of the smoking ban in England and Wales combined with the continuing deterioration in consumer confidence and expenditure in the United Kingdom due to the deterioration of general economic conditions in the United Kingdom.

Revenues from the sale of drink products decreased 23.9 per cent. to £395.4 million in the 2008 financial year from £519.4 million in the 2007 financial year, primarily due to the conversion of pubs from managed to leased. On a pub by pub basis, however, revenues from drink products increased to an annualised average of approximately £446,000 per pub from an annualised average of approximately £436,000 per pub in the previous period. This increase was largely due to the improved quality of the estate following the completion of the managed to leased conversion programme, and was partially offset by an underlying decrease in drinks revenue on a like-for-like basis of 4.6 per cent.

Revenues from food sales decreased 6.0 per cent. to £268.5 million in the 2008 financial year from £285.5 million in the 2007 financial year, primarily due to the conversion of pubs from managed to leased. On a pub by pub basis, however, revenues from food sales increased to an annualised average of approximately £303,000 per pub from an annualised average of approximately £240,000 in the previous year. This increase was largely due to the improved estate quality following the completion of the managed to leased conversion programme. Food revenues resisted decline substantially better than drinks revenues, due primarily to the conversion programme having a disproportionately greater impact on average food revenue, as the converted pubs had largely been beverage-led in nature. Underlying food revenue decreased by 0.4 per cent.

Machine and other revenues decreased 29.3 per cent. to £38.8 million in the 2008 financial year from £54.9 million in the 2007 financial year. This decrease was primarily due to the changes in the estate mix following the conversion programme and to an underlying reduction in machine and other revenues of 10.0 per cent. on a like-for-like basis, largely resulting from a decline in pure beverages trading volumes and increased competition from fixed-odds betting terminals.

Share of post-tax profit from joint ventures (before exceptional items)

In the 2008 financial year, the Group's share of post-tax profit from the Matthew Clark joint venture was £3.1 million, as compared to £1.6 million for the 2007 financial year. The increase over the previous year was largely due to the acquisition of 50 per cent. of Matthew Clark (Holdings) Limited having been completed on 17 April 2007, part way through the 2007 financial year.

Depreciation and amortisation (before exceptional items)

The depreciation and amortisation charge increased 10.6 per cent. to £62.5 million for the 2008 financial year from £56.5 million for the 2007 financial year, due primarily to increased levels of expenditure on fixtures and fittings within the business during the 2008 financial year and the 2007 financial year.

Operating profit (before exceptional items)

Total operating profit decreased 7.6 per cent. to £560.9 million in the 2008 financial year from £607.1 million in the 2007 financial year. The percentage decrease in operating profit was less than the corresponding decrease in revenue mainly due to a higher proportion of leased properties. Due to their operational structure, leased pubs tend to have a higher operating margin than managed pubs, which results in lower operating costs to the Group. 

Leased estate. The operating profit in the leased estate increased 1.7 per cent. to £469.4 million in the 2008 financial year from £461.7 million in the 2007 financial year. Operating margin increased slightly by 0.1 percentage points to 54.7 per cent. in the 2008 financial year. The increase in operating profit follows on from a 1.5 per cent. increase in revenues with a similar increase in gross margin. Costs remained relatively stable from period to period. However, the underlying reduction in pub-specific maintenance and support costs, following the disposal of less sustainable pubs in the 2007 financial year, was largely offset by an increase in rents payable relating to the conversion of a number of short leasehold managed pubs into the leased estate.

Managed estate. The operating profit in the managed estate decreased 38.5 per cent. to £88.4 million in the 2008 financial year from £143.8 million in the 2007 financial year. As a result, operating margin decreased by 4.1 percentage points to 12.6 per cent. in the 2008 financial year. The decrease in operating profit reflects the 18.3 per cent. decline in revenues which led to a 20 per cent. reduction in gross margin, both figures having been adversely affected by the 27 per cent. reduction in the average size of the estate. Operating costs could not be reduced by as fast a rate as the reduction in revenue. In particular, the change in the size of the estate had a relatively small impact on the depreciation charge and, consequently, operating margin fell by 4.1 percentage points to 12.6 per cent. 

Net finance costs (before exceptional items).  Net finance costs decreased 9.0 per cent. to £299.0 million in the 2008 financial year from £328.4 million in the 2007 financial year, principally due to the repayment of bank borrowings in October 2007.

Profit on sale of non-current assets (before exceptional items)

The Group continued to pursue its programme of estate management and selective disposals, which generated profit of £0.4 million in the 2008 financial year compared to £3.0 million in the 2007 financial year.

Tax (before exceptional items)

Taxation increased to £76.3 million in the 2008 financial year from £57.7 million in the 2007 financial year. Before profit on sale of non-current assets, exceptional items and share of post-tax earnings on joint ventures, the effective tax rate for the 2008 financial year was 29.5 per cent., compared to a rate of 20.8 per cent. for the 2007 financial year. The effective taxation charge in the previous financial year was significantly lower due to the deferred taxation indexation allowance being credited to the pre-exceptional tax line. Following a change in accounting treatment in the 2009 financial year (with a retrospective adjustment being reflected in the 2008 financial year), the impact on the tax line from indexation allowances is now reflected within exceptional items.

Exceptional items

The net effect, after tax, of the Group's exceptional items in the 2008 financial year was a cost of £250.7 million. The principal items were £294.7 million of impairment charges, a £31.1 million charge for the mark-to-market of certain interest rate swaps, a £2.7 million net increase in property liabilities and £14.0 million for reorganisation costs. The impairment recognised within the managed estate (£139.9 million) was primarily due to the reduction in profits experienced in the 2008 financial year, brought about by the change in the consumer market following the first full year of trade under the smoking ban in England and Wales, together with the continuing deterioration in consumer confidence and expenditure in the United Kingdom due to the deterioration of general economic conditions in the United Kingdom. The reduction in profits has subsequently impacted the value-in-use calculation. The impairment has been recognised on pubs where their expected future cash flows have fallen to a level such that their value-in-use is below carrying value. The impairment recognised within the leased estate (£154.8 million) was primarily due to the identification of 491 pubs considered unlikely to generate long-term sustainable growth following the change in the consumer environment following the first full year of the smoking ban in England and Wales and the deterioration in economic conditions. The tax effect of these items together with the tax impact of indexation and finalising a number of prior year tax matters with HMRC gave rise to an exceptional tax credit of £91.8 million.

The net effect, after tax, of the Group's exceptional items in the 2007 financial year was a credit of £54.4 million. The principal items were £41.8 million of redundancy costs, acquisition integration costs, licensing reform costs and other related one-off charges, a £54.2 million credit for the mark-to-market of certain interest rate swaps, £21.5 million net reduction in property liabilities and £10.9 million charge on terminating financing arrangements. The tax effect of these items together with a number of prior year tax matters agreed with HMRC gave rise to an exceptional tax credit of £31.4 million. 

Results of operations for the 52 weeks ended 18 August 2007 (the ''2007 financial year'') compared to the 52 weeks ended 19 August 2006 (the ''2006 financial year'')

Revenue

Revenue increased 10.3 per cent. to £1.70 billion in the 2007 financial year from £1.55 billion in the 2006 financial year. This increase resulted primarily from the inclusion of a full year's trading of the managed pubs acquired in the Spirit acquisition.

Leased estate. Revenues in the leased estate increased 5.2 per cent. to £845.1 million in the 2007 financial year from £803.3 million in the 2006 financial year. The average number of leased pubs during the 2007 financial year was 7,873 compared to 7,945 for the 2006 financial year. The increase in revenues was primarily due to an improvement in the quality of the Group's pubs following the conversion of 563 pubs from managed to leased during the 2007 financial year, and the disposal of 933 non-core smaller pubs.

Revenues from the sale of drink products increased 5.1 per cent. to £577.3 million in the 2007 financial year from £549.1 million in the 2006 financial year. On a pub by pub basis, revenues from drink products increased to an annualised average of approximately £73,300 per pub from an annualised average of approximately £69,100 per pub in the prior period. Insofar as underlying drink revenues declined by 0.8 per cent. on a like-for-like basis, the increase in total drinks revenue per pub is therefore principally a result of the improvement in the estate quality, on average, during the 2007 financial year.

Revenues from rents increased 11.1 per cent. to £235.7 million in the 2007 financial year from £212.2 million in the 2006 financial year. This increased average annualised rental revenue per pub to approximately £29,900 from approximately £26,700 in the prior period. As with drinks revenue, the impact of improvement in average estate quality brought about a significant increase in rental revenue, with underlying rental growth on a like-for-like basis of 4.5 per cent. 

The 8.4 per cent. increase in machine and other revenues to £32.1 million in the 2007 financial year from £29.6 million in the 2006 financial year resulted from the improvement in average estate quality, with underlying growth in machine revenues remaining relatively flat at 0.1 per cent. Growth on a like-for-like basis.

Managed estate. Revenues in the managed estate increased 15.8 per cent. to £859.8 million in the 2007 financial year from £742.8 million in the 2006 financial year, the increase being primarily due to the inclusion of a full year's trading of the managed pubs acquired in the Spirit acquisition. Revenues from the sale of drink products increased 12.1 per cent. to £519.4 million in the 2007 financial year from £463.3 million in the 2006 financial year. Underlying drink sales increased by 2.3 per cent. on a like-for-like basis, with the remainder of the increase in revenues being due to the improved average quality of the estate compared to the previous year.

Revenues from food sales increased 22.0 per cent. to £285.5 million in the 2007 financial year from £234.0 million in the 2006 financial year. Underlying food sales increased by 5.8 per cent. On a like-for-like basis, with the remainder of the increase in revenues being due to the improved average quality of the estate compared to the previous year.

The 20.7 per cent. increase in machine and other income to £54.9 million in the 2007 financial year from £45.5 million in the 2006 financial year was primarily due to the change in the estate size in the year, with underlying growth in machine and other sales of 1.0 per cent. on a like-forlike basis.

Share of post-tax profit from joint ventures (before exceptional items)

In the 2007 financial year, the Group's share of post-tax profit from the Matthew Clark joint venture was £1.6 million, the acquisition of 50 per cent. of Matthew Clark (Holdings) Limited having been completed on 17 April 2007, part way through the 2007 financial year.

Depreciation and amortisation (before exceptional items)

The depreciation and amortisation charge increased 22.6 per cent. to £56.5 million for the 2007 financial year from £46.1 million for the 2006 financial year, primarily due to the increase in the size of the managed estate as a result of the Spirit acquisition.

Operating profit (before exceptional items) 

Total operating profit increased 8.4 per cent. to £607.1 million in the 2007 financial year from £560.2 million in the 2006 financial year. The percentage increase was less than the percentage increase in revenue mainly because of a higher percentage of sales being generated from the managed business following the inclusion of a full year's trading of the Spirit business (managed pubs having a lower operating profit margin). 

Leased estate. The operating profit in the leased estate increased 9.8 per cent. to £461.7 million in the 2007 financial year from £420.4 million in the 2006 financial year. Operating margin increased by 2.3 percentage points to 54.6 per cent. in the 2007 financial year. The increase in operating profit follows on from a 5.2 per cent. increase in revenues. Cost increases were contained during the period, and operating margin also benefited from the improved average quality of the estate following further selective acquisitions and disposals of pubs.

Managed estate. The operating profit in the managed estate increased 2.9 per cent. to £143.8 million in the 2007 financial year from £139.8 million in the 2006 financial year. Operating margin decreased by 2.1 percentage points to 16.7 per cent. in the 2007 financial year. The increase in operating profit was primarily due to the inclusion of a full year's trading of the managed pubs acquired in the Spirit acquisition. Operating margins declined, however, due to increased cost pressure from labour, utilities and other pub-specific costs. 

Net finance costs (before exceptional items) 

Net finance costs increased 5.3 per cent. to £328.4 million in the 2007 financial year from £312.0 million in the 2006 financial year, principally due to the increase in average net debt following the full year inclusion of the debt incurred in connection with the Spirit acquisition.

Profit on sale of non-current assets (before exceptional items)

The Group continued to pursue its programme of estate management and selective disposals, which generated profit of £3.0 million in the 2007 financial year, compared to £1.4 million in the 2006 financial year.

Tax (before exceptional items)

Taxation increased to £57.7 million in the 2007 financial year from £54.8 million in the 2006 financial year. Before profit on sale of non-current assets, exceptional items and share of post-tax earnings on joint ventures, the effective tax rate for the 2007 financial year was 20.8 per cent., compared to 22.1 per cent. for the 2006 financial year. The tax rate is significantly below the standard UK corporation tax rate due to the benefit of indexation allowance credits on the tax-based cost of properties.

Exceptional items

The net effect, after tax, of the Group's exceptional items in the 2007 financial year was a credit of £54.4 million. The principal items were £41.8 million of redundancy costs, acquisition integration costs, licensing reform costs and other related one-off charges, a £54.2 million credit for the mark-to-market of certain interest rate swaps, a £21.5 million net reduction in property liabilities and a £10.9 million charge on terminating financing arrangements. The tax effect of these items together with a number of prior year tax matters agreed with HMRC gave rise to an exceptional tax credit of £31.4 million. 

The net effect, after tax, of the Group's exceptional items in the 2006 financial year was a credit of £52.0 million. The principal items were £8.2 million of redundancy costs, acquisition integration costs, licensing reform costs and other related one-off charges, and a £39.7 million credit for the mark-to-market of certain interest rate swaps together with the adjustments to tax in prior periods and the finalisation of past tax matters. The tax effect of these items gave rise to an exceptional tax credit of £20.6 million.

Cash flow, liquidity and capital resource

Since its formation, the Group's principal sources of funds have been long-term borrowings (including notes issued under its securitisations and the Convertible Bonds), equity contributions from Shareholders and cash flows from operating activities. The Group's principal uses of funds have been to repay debt on borrowed funds, for capital expenditure to repair and refurbish pubs, to pay interest, to finance acquisitions and, until recently, to pay dividends. The Group's debt levels require it to dedicate a majority of its cash flow from operations to debt service payments. Net cash generated can fluctuate significantly depending primarily on debt amortisation and the availability of risk to upstream from the Group's securitisations.

Cash flow

The table below sets out the main components of the Group's operating free cash flow:


28 weeks to 7 March 2009

28 weeks to 1 March 2008

53 weeks to 23 August 2008

52 weeks to 18 August 2007

52 weeks to 19 August 2006


  £m

  £m

  £m

  £m

  £m

Net cash inflow from operations

194.9

284.6

607.8

529.3

535.1

Net cash generated from (used in) investing activities

(16.4)

(86.2)

(125.7)

63.9

423.4

Net cash (used in) financing activities

(317.6)

(243.4)

(428.6)

(887.9)

(641.8)

Net (decrease)/increase in cash and cash equivalents

(139.1)

(45.0)

53.5

(294.7)

316.7

Cash and cash equivalents at end of period

182.1

222.7

321.2

267.7

562.4


Net cash inflow from operations

The primary source of the Group's cash flow is funds generated by operating activities. For the 2009 interim period, net cash generated from operating activities decreased 31.5 per cent. To £194.9 million compared to £284.6 million for the 2008 interim period. The reduction in cash flow from operating activities was principally due to a decrease in EBITDA after exceptional items of £71.7 million following the slowdown in consumer spending amid generally worsening economic conditions affecting the industry as a whole, and the £21.1 million income tax refund in the 2008 interim period. Due to the seasonality of trading and the timing of the half-year-end dates (which fall towards the start of a calendar month), as opposed to year-end dates (which fall just before the end of a calendar month), the Group's working capital position has historically been approximately £50 million higher at the half-year-end date as compared to the year-end-date.

For the 2008 financial year, net cash generated from operating activities increased 14.8 per cent. to £607.8 million compared to £529.3 million for the 2007 financial year. EBITDA after exceptional items decreased by £36.6 million in the 2008 financial year following the slowdown in consumer spending amid generally worsening economic conditions affecting the industry as a whole. The other principal factor affecting the increased cash flow from operating activities was an improvement in tax cash flow following a £21.4 million tax refund in the period, compared to an £18.6 million tax payment in the 2007 financial year. The improved operating cash flow in the 2008 financial year was also due to an improved working capital and provisions cash flow of approximately £75 million due to certain significant one-time working capital outflows in the previous year resulting from changes in the size and make-up of the pub estates, with 563 pubs having been converted from managed to leased and 986 pubs having been disposed of in the 2007 financial year.

For the 2007 financial year, net cash generated from operating activities decreased 1.1 per cent. To £529.3 million compared to £535.1 million for the 2006 financial year. EBITDA after exceptional items increased by £45.2 million due to the increased profitability of the business following the inclusion of a full year's trading of the managed pubs acquired in the Spirit acquisition. Due to the significant changes in the size and make-up of the pub estate following various acquisitions, disposals and pub conversions in the 2007 and 2006 financial years, there were significant onetime working capital and provision cash outflows resulting in working capital and provision cash outflows of £95.4 million and £30.7 million in the 2007 and 2006 financial years, respectively. As mentioned above, during the 2007 financial year, 563 pubs were converted from managed to leased, and 986 pubs were sold. In the 2006 financial year, 1,830 managed pubs were acquired (as a result of the Spirit acquisition), 74 pubs were converted from managed to leased and 902 pubs were sold.

Net cash generated from (used in) investing activities

For the 2009 interim period, net cash used in investing activities amounted to £16.4 million, compared to £86.2 million for the 2008 interim period. This decrease of £69.8 million, or 81 per cent., in net cash used in investing activities was largely the result of a £22.0 million decrease in expenditures on acquisitions, a £25.1 million decrease in investments in property, plant and equipment, and a £21.2 million increase in the proceeds from the sale of property, plant and equipment and other non-current assets. 

For the 2008 financial year, net cash used in investing activities amounted to £125.7 million, compared to £63.9 million generated from investing activities for the 2007 financial year. This increase of £189.6 million in net cash used in investing activities was largely the result of a £339.7 million decrease in proceeds from the sale of property, plant and equipment and a £32.1 million decrease in proceeds from the sale of other non-current assets, offset by a £125.6 million decrease in net cash used for the purchase of property, plant and equipment.

For the 2007 financial year, net cash generated from investing activities was £63.9 million compared to £423.4 million for the 2006 financial year. This decrease of £359.5 million in net cash generated from investing activities was largely the result of a £430.4 million decrease in disposal proceeds and a £61.1 million increase in investments in property, plant and equipment and intangible assets, offset by a £132.0 million reduction in acquisition expenditure.

Net cash generated (used in) financing activities

For the 2009 interim period, net cash used in financing activities amounted to £317.6 million, compared to £243.4 million for the 2008 interim period. This increase of £74.2 million, or 30.5 per cent., in net cash used in financing activities was largely due to £49.5 million being used for the repayment of convertible bonds and a £61.6 million increase in other debt repayments, offset by the absence of any dividend payment.

For the 2008 financial year, net cash used in financing activities amounted to £428.6 million, compared to £887.9 million used in financing activities in the 2007 financial year. This decrease of £459.3 million, or 51.7 per cent., in net cash used in financing activities was largely the result of a £416.0 million decrease in net loan repayments in the year following the repayment of borrowings in the 2007 financial year relating to the financing of the Spirit acquisition.

For the 2007 financial year, net cash used in financing activities was £887.9 million, compared to £641.8 million for the 2006 financial year. This increase of £246.1 million, or 38.3 per cent., in net cash used in financing activities was largely the result of net debt repayments in the 2007 financial year in relation to repaying the Spirit acquisition facility borrowings. The cash flows from financing activities in the 2006 financial year also benefited from the proceeds of the equity issue and the issue of convertible bonds.

Capital expenditure

In the 2009 interim period, capital expenditure on existing pubs and infrastructure amounted to £56.9 million, compared to £83.5 million for the 2008 interim period. As at 7 March 2009, the Group had committed £11.3 million of capital expenditure on pub refurbishment, and currently has plans for approximately £90 million of further capital expenditure in this area over the next 12 months. As part of the Group's strategy to address the challenges posed by the current economic climate, capital expenditures have been scaled back where possible. This includes the scaling back of spend on pub acquisitions, which amounted to nil for the 2009 interim period, compared to £22.0 million for the 2008 interim period.

In the 2008 financial year, the Group spent approximately £136 million by way of capital expenditure on existing pubs and infrastructure, of which the majority was spent on pub refurbishment and related capital expenditure. In addition, approximately £24 million was spent on new pub acquisitions.

In the 2007 financial year, the Group spent approximately £202 million by way of capital expenditure on existing pubs and infrastructure. In addition, approximately £139 million was spent on new pub acquisitions: the acquisition of the Mill House group (net of debt) and the 50 per cent. investment in the Matthew Clark joint venture.

In the 2006 financial year, the Group spent approximately £141 million by way of capital expenditure on existing pubs and infrastructure. In addition, approximately £271 million was spent on new pub acquisitions and the acquisition of the Spirit business (net of debt).

The Group invests in pubs following defined criteria with the objective of increasing pub profitability. Opportunities are identified by both the Group and retailers, and are prioritised according to their estimated return on investment. Each project is subject to a detailed review prior to capital expenditure by the Group.

Under the terms of the Punch A Securitisation and the Punch B Securitisation, the Group is required to spend at least £1,000 annually per pub, adjusted annually according to the annual increase in the UK retail prices index (in the case of the Punch A Securitisation), and £500 semi-annually, adjusted annually according to the annual increase in the UK retail prices index (in the case of the Punch B Securitisation), in maintenance capital expenditure and may spend additional amounts out of excess cash if the calculated return on capital expenditure for prior periods is sufficiently high. In addition, under the Punch B Securitisation, the Group is required to spend £10 million semi-annually on investment capital expenditure.

Under the Spirit Debenture, the Group is required to spend an amount equal to the higher of (i) 5.5 per cent. of the turnover of the pubs in the Spirit Debenture and (ii) one-quarter of £27,500, adjusted annually according to the annual increase in the UK retail prices index, per pub during ach financial quarter in the case of the managed pubs and one quarter of £2,000, adjusted annually according to the annual increase in the UK retail prices index, per pub in the case of the leased pubs.

Working capital

The Group, in common with other leased and tenanted pub companies, receives rental and drinks ales payments from its retailers on a weekly, fortnightly or monthly basis but generally is able to obtain longer trade credit in purchasing supplies. This differs from managed pub companies which receive payment from their customers at the time of sale and are generally able to obtain longer trade credit in purchasing supplies. As a result, leased and tenanted pub companies and managed pub companies frequently operate with negative operating working capital. In addition, interest payments on the Group's securitised debt (of which £4.43 billion in nominal value was outstanding at 7 March 2009) are made quarterly in arrears which results in significant accrued interest balances being held on balance sheet. As at 7 March 2009, the Group had negative working capital (including accrued interest costs, but excluding cash and loan balances) of £229.7 million, as compared to £237.3 million as at 1 March 2008.

As at 23 August 2008, the Group had negative working capital (including accrued interest costs, but excluding cash and loan balances) of £278.5 million, as compared to £235.4 million as at 18 August 2007, an improvement of £43.1 million. The change in working capital in the 2008 financial year was largely due to a £37.5 million income tax receivable as at 18 August 2007.

As at 18 August 2007, the Group had negative working capital (including accrued interest costs, but excluding cash and loan balances) of £235.4 million, as compared to £363.6 million as at 19 August 2006, a decrease of £128.2 million. This decrease was primarily due to a £53.3 million change in corporation tax liabilities and the significant change in the size and shape of the estate in the year following the acquisition of the Spirit managed pub business.

Liquidity

The Group's key sources of liquidity have been cash flows from operations, the proceeds of listed notes issued under its securitisations, the Convertible Bonds, equity contributions from Shareholders and, from time to time, short-term bank financing. In addition to proceeds from its ongoing divestment programme, these are expected to continue to be the key sources of liquidity for the Group. The Group had net outstanding debt (exclusive of derivative financial instruments) of £4.61 billion as at 7 March 2009, as compared to £4.67 billion as at 23 August 2008 and £4.80 billion as at 18 August 2007. As at 30 May 2009, this figure was £4.35 billion. The securitisation notes and the Convertible Bonds are the principal components of the Group's debt.

The securitisation notes are issued under three separate securitisations, the Punch A Securitisation, the Punch B Securitisation and the Spirit Debenture. As at 7 March 2009, the Group had approximately £4.43 billion of securitisation notes in issue, secured over more than 7,900 pubs (out of a total of 8,384 pubs owned by the Group). As at 30 May 2009, this figure was approximately £4.23 billion secured over more than 7,900 of the 8,165 pubs owned by the Group. Approximately 92 per cent. of the capital balance on these notes is repayable after more than five years from the interim balance sheet date (7 March 2009), subject to compliance with the relevant covenants. For further information on the Group's securitisations, see the section below headed ''Securitisations''.

A subsidiary of the Company issued £275.0 million in principal amount of Convertible Bonds (maturing in December 2010) to fund part of the costs of acquiring the Spirit Group in 2006. As at 7 March 2009, £218.2 million in principal amount (including accreted redemption premium payable on maturity) remained outstanding under the Convertible Bonds. As at 30 May 2009, this figure was £215 million. The Convertible Bonds are guaranteed by Punch. For further information on the Convertible Bonds, see the section below headed ''Other debt''.

The Group repaid £205.7 million of debt in the period between the end of the 2008 financial year on 23 August 2008 and the end of the 2009 interim period on 7 March 2009, including the purchase of £66.0 million in nominal amount of Convertible Bonds. In total, this represented a 4 per cent. reduction in the nominal value of the Group's gross debt as at 7 March 2009 compared to 23 August 2008. From 7 March 2009 to 30 May 2009, the Group repaid a further £198.6 million of debt, including the purchase of £3.5 million in principal amount of Convertible Bonds, leaving £205.5 million in nominal amount due to be repaid in December 2010. Repaying securitisation debt has helped the Group exceed minimum compliance requirements under the DSCR financial covenants under the securitisations. Of the £404.3 million aggregate debt repaid in the financial year to date, £397.6 was repaid ahead of schedule. By comparison, the scheduled amortisation through to the end of the 2010 financial year amounts to £43 million. When the Group repays securitisation debt ahead of schedule, it may incur break costs associated with the financial guarantees given by Ambac and MBIA and costs to the extent it cancels any related interest rate hedge. Interest rate swaps are accounted for in the Group's financial statements at their market value. The net impact on the Group's income statement for the cancellation of an interest rate swap will therefore be the difference in the cost of cancelling the swap and its fair value at the last balance sheet date.

The cash used to repay debt has primarily come from disposals of the Group's unsecuritised assets (to third parties and, in some instances, to companies within the Group's securitisations), disposals of certain of the Group's securitised assets and cash from operating activities paid out of the Punch A and Punch B securitisations. Realisation of value from the Group's unsecuritised assets also resulted in the Group cancelling its undrawn £50 million revolving credit facility ahead of schedule, which has saved costs and increased the Group's flexibility in disposing of assets.

Securitisations

As referred to above, the Group has raised cash by way of listed notes issued under three separate securitisations secured over more than 7,900 pubs (out of a total of 8,165 pubs owned by the Group as at 30 May 2009). Under the Punch A Securitisation, Punch Finance plc has issued ten currently outstanding series of fixed and floating rate notes with an aggregate principal value of £1.95 billion as at 30 May 2009 and maturity dates from 2014 to 2033. Under the Punch B Securitisation, Punch Taverns Finance B Limited has issued seven currently outstanding series of fixed and floating rate notes, with an aggregate principal value of £1.20 billion as at 30 May 2009 and maturity dates from 2015 to 2035. Under the Spirit Debenture, Spirit Issuer plc has issued five currently outstanding series of debenture bonds, with an aggregate principal value of £1.08 billion as at 30 May 2009 and maturity dates from 2011 to 2034. Certain notes issued under the Punch A Securitisation and the Spirit Debenture have the benefit of an Ambac guarantee as to the payment of scheduled interest and scheduled or ultimate principal on those notes, and certain notes issued under the Punch B Securitisation have the benefit of an MBIA financial guarantee as to the payment of scheduled interest and scheduled principal on those notes. In the 40 weeks of the current financial year to 30 May 2009, £115.9 million in nominal value issued under the Punch A Securitisation, £47.2 million in nominal value issued under the Punch B Securitisation and £171.2 million in nominal value issued under the Spirit Debenture was repaid or repurchased by the Group at a discount to nominal value, resulting in a reduction of £334.3 million in the nominal value of securitisation notes outstanding at a cost of £205.7 million.

The indebtedness owing in respect of the securitisations is required to be repaid in accordance with agreed amortisation schedules up to and including the final maturity of the respective notes. The interest payable on the floating rate notes (or notes that convert to floating rate notes) has been hedged to a fixed rate. The securitisations include provisions which set out the priority of payments to be made on each interest payment date using available cash at the relevant time. The use of available cash for other activities, including making acquisitions and making payments to other members of the Group is only permitted after the payment or allocation of funds for the purpose of payment of fees, interest and principal repayments in respect of the securitisations and is further subject to the covenants discussed below.

The Group is subject to certain covenants and performance tests under its securitisations. Despite the current challenging market conditions, the Group has maintained headroom under the key DSCR financial covenants by a margin of 23 per cent., 28 per cent. and 32 per cent. under the Punch A Securitisation, the Punch B Securitisation and the Spirit Debenture, respectively, as at 7 March 2009 (the last testing date). As at the last applicable testing dates, the Group also exceeded the minimum compliance requirements under the minimum net worth covenants contained in the Punch A Securitisation and Punch B Securitisation and the loan-to-value ratio in the Spirit Debenture. If any of these covenants are breached, due, for example, to a decline in the Group's operating profit resulting from economic conditions it may result in an event of default in a securitisation which, if not cured or waived, could result in the enforcement of security within a securitisation and/or the appointment of an administrative receiver to the securitisation group and/or the acceleration of all or a substantial portion of the Group's debt.

The obligation to repay the notes issued under each of the Group's securitisations is limited in recourse to the assets of the companies within the relevant securitisation group. Accordingly, as is common for transactions of this type, there are no cross default clauses in the securitisations providing that an event of default is triggered under the securitisations as a result of a default in, or acceleration of, the Group's debt outside the relevant securitisation group (including a default under another securitisation group's debt or a payment default under the Convertible Bonds. By contrast, the Convertible Bonds contain a cross default clause which is triggered if any of the debt of the Group is not paid when due or if any of the debt in the Group is accelerated, subject in each case to a de minimis of £2,500,000. A payment default or acceleration of the debt in the Group's securitisations would be caught by this clause. In the longer term, a default in the securitisations could therefore lead to an acceleration of the Convertible Bonds.

Cash generated by the operating companies within a securitisation can be paid to members of the Group (including the Company) outside of that securitisation if, among other things, the DSCR is above a prescribed minimum. At present, both the Punch A Securitisation and the Punch B Securitisation satisfy the performance tests for payments outside of their respective securitisations.

Punch does not expect that such performance tests will continue to be met in the next financial year, but Punch does not expect this to affect the Group's ability to reduce debt levels within the respective securitisations. If the performance tests are not satisfied, then those securitisations will only be entitled to make certain limited payments to members of the Group outside of the securitisations. The Spirit Debenture does not currently satisfy all the performance tests for such payments and is therefore not entitled to make payments to Group members outside its securitisation group (subject to certain limited exceptions) until it does meet those performance tests. Where the performance tests for payment outside of the securitisation are not met, that cash is available to be used by members of the relevant securitisation, including (subject to certain conditions) for the purposes of funding capital expenditure, making acquisitions or reducing debt within the relevant securitisation. For the 2009 interim period, the proportion of the Group's operating profit generated by pubs within the securitisations (and therefore subject to the above performance tests in relation to payments) was approximately 99 per cent. 

Other debt

Punch Taverns (Redwood Jerseyco) Limited, a Jersey incorporated subsidiary of the Company, issued £275.0 million in principal amount of 5.0 per cent. Convertible Bonds on 14 December 2005, which are irrevocably and unconditionally guaranteed by the Company. Unless previously redeemed, converted or purchased and cancelled, the Convertible Bonds mature five years from the issue date at 107.21 per cent. of their principal amount (which is a total of £220.3 million (including accreted redemption premium payable on maturity) based on £205.5 million principal amount outstanding as at 30 May 2009). Each Convertible Bond is convertible at the option of the holder, into preference shares of Punch Taverns (Redwood Jerseyco) Limited, the issuer of the Convertible Bonds, which are then exchangeable into Ordinary Shares of the Company at an initial exchange price of £11.782 per share. The exchange price is subject to adjustment in certain circumstances (including as a result of the Firm Placing and the Placing and Open Offer). The price of an Ordinary Share at the date of pricing the Convertible Bonds in the market was £8.60.

The Group intends to use the proceeds from the Firm Placing and the Placing and Open Offer for, among other things, the Convertible Bond Tender pursuant to which the Group will invite Bondholders to offer any or all of the outstanding Convertible Bonds for purchase by the Group. To the extent that the Convertible Bonds are not purchased pursuant to the Convertible Bond Tender, the Group will consider repurchasing any remaining Convertible Bonds as and when appropriate opportunities arise or will redeem the Convertible Bonds on their maturity in December 2010. 

Off-balance sheet arrangements

The Group has no off-balance sheet arrangements.

Contractual obligations

The Group has significant financial obligations under contracts, particularly minimum lease payments. The future minimum rentals payable under non-cancellable operating leases when discounted to present value were £682.9 million as at 23 August 2008, and £554.6 million as at 18 August 2007. The total future minimum sublease payments expected to be received, when discounted to present value, were £231.0 million as at 23 August 2008, and £212.8 million as at 18 August 2007.

Capital commitments for property, plant and equipment were £11.3 million as at 7 March 2009, £19.2 million as at 23 August 2008 and £22.2 million as at 18 August 2007. Further information in relation to the Group's financial obligations under contracts is set out on pages 100 to 101 of the 2008 Annual Report and Financial Statements.

Disclosure about market risk

The principal financial market risks that the Group faces are liquidity risks, the risks of interest rate movements, and credit risks. There is no currency exposure as all material transactions are in pounds sterling. The Board reviews and agrees all policies with respect to market risks.

Liquidity risk

The Group's funding strategy is to ensure a mix of financing methods offering flexibility and cost effectiveness to match the requirements of the Group. The Group's objective is to smooth the debt maturity profile and to arrange funding ahead of requirements and to refinance debt as it falls due. Cash flow forecasts are regularly produced to assist management in identifying liquidity requirements. This includes assessments of the ability to meet the 'restricted payment conditions' in the three securitisations in order that cash can be released to the Company. Cash balances are invested in short-term deposits such that they are available to settle short-term liabilities or to fund capital additions.

The Group is highly leveraged, and is primarily financed by the secured listed notes issued under its securitisations. Approximately 92 per cent. of the capital balance on these notes is repayable after more than five years from the interim balance sheet date (7 March 2009), subject to compliance with the relevant covenants. If the Group is unable to generate sufficient cash from operations and asset sales to fund its existing debt obligations, the Group may be required to seek alternative sources of funding to redeem the Convertible Bonds on their maturity in December 2010 if the Firm Placing and the Placing and Open Offer do not proceed. However, continuing disruptions in the credit markets may make it impossible for the Group to refinance its existing debt on acceptable terms. For further information, see the section headed ''Factors affecting the Group's results of operations and financial position - Financial and operating covenants'' in this section and the risk factors set out above in this announcement.

Interest rate risk

As the Group has no significant interest-bearing assets, other than cash and cash equivalents, the Group's income and related operating cash flows are substantially independent of changes in market interest rates. Income and cash flows from cash and cash equivalents fluctuate with interest rates.

The Group finances its operations through a mixture of equity Shareholders' funds, notes issued under its securitisations, the Convertible Bonds and, from time to time, short-term bank financing. The Group borrows at both fixed and variable rates of interest and employs derivative financial instruments such as interest rate swaps to manage the primary market exposures associated with the underlying assets, liabilities and existing or known future positions. The Group does not use derivatives transactions to enhance profits or for speculative purposes. Further information regarding the risks to which the Group is exposed and the policies designed to manage those risks is set out on pages 82 to 84 of the 2008 Annual Report and Financial Statements.

The Group is primarily exposed to movements in UK pound sterling interest rates. The Group enters into interest rate swaps to hedge interest costs in order to achieve a stable level of variable and fixed-rate debt. This allows the Group to manage the level of variable rate debt throughout its operations. The Group seeks to eliminate over-hedging (which may arise, for example, due to early repayment of floating rate notes) whenever this is financially practicable either by embedding the cost in new swaps or by terminating the over-hedge.

The Group has taken out derivative financial instruments which have increased the extent to which interest rates are effectively fixed, such that 99.7 per cent. of all debt instruments at 23 August 2008 and at 18 August 2007 had or were to have their rates fixed as a result of swap arrangements commencing from the year-end date. The fair value of the interest rate hedges at 7 March 2009 amounted to a liability of £416.8 million, having increased from a liability of £179.7 million at 23 August 2008 due to reductions in the long-term interest rates. The liability at 18 August 2007 amounted to £96.9 million. Cash flows associated with cash deposits and interest rate swaps and the fair value of these instruments fluctuate with changes in interest rates. If the interest rates had been 1 per cent. higher during the period, the effect on the income statement during the 2008 financial year would have been to reduce net financing costs by £2.2 million and to increase the fair value of interest rate swaps by £74.9 million, and if the interest rates had been 1 per cent. lower during the period, the effect on the income statement during the 2008 financial year would have been to increase net financing costs by £2.2 million and to reduce the fair value of interest rate swaps by £74.9 million.

While cash flow interest rate risk is largely eliminated, the use of fixed rate borrowings and derivative financial instruments exposes the Group to fair value interest rate risk. For example, for the 2008 financial year, the Group incurred a £31.1 million charge for the mark-to-market of certain interest rate hedges. The use of fixed-rate borrowings and derivative financial instruments also means that the Group does not benefit from falls in interest rates and is exposed to unplanned costs should debt or derivative financial instruments be restructured or repaid early. In the current economic conditions, the interest rates are largely below the rates fixed under the hedging instruments. Accordingly, the fair value of these capital instruments as at 7 March 2009 gave rise to a net liability of £416.8 million. In accordance with IFRS, a provision has been made for this in the Group's Financial Statements.

Credit risk

With the exception of cash and short-term deposits invested with banks and financial institutions, there are no significant concentrations of credit risk within the Group. The maximum credit risk exposure relating to financial assets is represented by the carrying value as at the balance sheet date. The Group's objective is to minimise credit risk by ensuring that surplus funds are invested with banks and financial institutions with high credit ratings and that the Group deals with third parties that have been subject to credit checks, or that have good credit scores, where appropriate. The Group has taken out a number of interest rate swaps with financial institutions for the purpose of hedging its exposure to changes in interest rates. As at the 23 August 2008 balance sheet date, only one of these instruments was held as a financial asset, valued at £1.4 million. Trade and other receivables, as shown on the consolidated balance sheet, are shown net of a provision for doubtful debts, which management estimates based on a review of all individual receivable accounts, experience and known factors at the balance sheet date, taking into account any collateral held in the form of cash deposits, which is quantified. These cash deposits are applied against unpaid debt when retailers leave the pubs, and vary in size. The amount of such cash deposits was £40.4 million at 7 March 2009, £43.1 million at 23 August 2008, £41.3 million at 18 August 2007 and £33.1 million at 19 August 2006. They are held on the balance sheet within trade and other payables. Receivables are written off against the doubtful debt provision when management deems the debt to be no longer recoverable.

Dividend policy

The Board did not recommend a final dividend for the 2008 financial year or for the 2009 interim period, and does not anticipate the Company paying or declaring any dividends for the remainder of the 2009 financial year. The Board considers it prudent to retain cash and further strengthen the balance sheet ahead of returning cash to Shareholders. The final dividends per Ordinary Share paid in respect of the 2007 and 2006 financial years were, respectively, 10.2 and 9.0 pence per Ordinary Share.

Critical accounting policies

Like other companies, under English company law, the Company is required to prepare financial statements for each financial year which give a true and fair view of its state of affairs and of its profit and loss for that period. To do so, it must adopt suitable accounting policies and make reasonable and prudent judgments and estimates. Accounting policies may vary from company to company in accordance with the discretion allowed in selecting such accounting policies while still resulting in financial statements which give a true and fair view.

The Company believes the following critical accounting policies encompass the more significant judgments and estimates used in the preparation of the financial statements:

Impairment of assets

Goodwill is not amortised but is tested at least annually for impairment. Property, plant and equipment are reviewed for impairment if circumstances suggest that the carrying amount may not be recoverable. An impairment loss is recognised in the income statement for the amount by which the asset's carrying value exceeds its recoverable amount. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable and independent cash flows for the asset being tested for impairment. In the case of goodwill, impairment is assessed at the level of the Group's cash generating units. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use.

Management necessarily applies its judgment in estimating the timing and value of underlying cash flows within the value-in-use calculation, as well as determining a suitable discount rate in order to calculate the present value of those cash flows. Subsequent changes to the magnitude and timing of cash flows could impact the carrying value of the respective assets.

Post-employment benefits

The present value of defined benefit pension liabilities is determined on an actuarial basis and depends on a number of actuarial assumptions. The calculated liabilities of the Group's defined benefit pension schemes are based on assumptions regarding inflation rates, discount rates and long-term expected return on the scheme's assets and member longevity. Such assumptions are based on actuarial advice and are benchmarked against similar pension schemes. Any change in these assumptions could impact the carrying amounts of the Group's pension liabilities.

Depreciation

Property, plant and equipment assets are carried at cost or deemed cost less accumulated depreciation and any recognised impairment in value. Depreciation is charged to write off the cost of property, plant and equipment, less estimated residual values, by equal annual instalments over the asset's life. The depreciation charge is dependent on a number of judgements including that with regard to the asset's useful life and the residual value. If residual values were lower than estimated, an impairment of asset value and a reassessment of future depreciation charge may be required. Useful economic lives are reassessed annually which may lead to an increase or reduction in depreciation accordingly.

Taxation

Judgment is required when determining the provision for taxes, as the tax treatment ofsome transactions cannot be finally determined until a formal resolution has been reached with the tax authorities. Tax benefits are not recognised unless it is probable that the benefit will be obtained. Tax provisions are made where it is considered likely that a liability will arise. The Group reviews each significant tax liability or benefit to assess the appropriate accounting treatment. 

Capitalisation and indebtedness

Capitalisation

The table below sets out the Group's total capitalisation as at 7 March 2009 extracted without material adjustment from the Group's unaudited interim balance sheet. 


   £m

Called-up share capital

    0.1

Share premium account

    455.0

Equity component of Convertible Bonds

    22.8

Total capitalisation as at 7 March 2009(1)

    477.9


Total capitalisation excludes the hedge reserve, share-based payment reserve and retained earnings, which together amounted to £832.6 million as at 7 March 2009.

There has been no material change to the capitalisation of the Group since 7 March 2009.

Indebtedness

The table below sets out the indebtedness of the Group as at 30 May 2009, extracted without material adjustment from the Group's unaudited internal management accounts:





£m

£m

Total current debt


44.2

Current debt - secured

44.2


Current debt - unsecured

-


Total non-current debt


4,539.6

Non-current debt - secured

4,334.7


Non-current debt - unsecured

204.9


Total indebtedness as at 30 May 2009


4,583.8




There has been no material change to the indebtedness of the Group since 30 May 2009






Statement of net indebtedness as at 30 May 2009






Cash and cash equivalents

(237.0)


Liquidity


(237.0)

Current securitised debt

43.9


Current capitalised borrowing costs (securitised)

(2.4)


Current finance lease

2.7


Current financial indebtedness


44.2

Net current financial indebtedness


(192.8)

Non-current securitised debt

4,333.9


Non-current capitalised borrowing costs (securitised)

(15.4)


Non-current finance lease

16.2


Non-current unsecuritised debt 

206.8


Non-current capitalised borrowing costs (unsecuritised) 

(1.9)


Non-current financial indebtedness 


4,539.6


Net Financial Indebtedness



4,346.8





  APPENDIX III

TERMS AND CONDITIONS

IMPORTANT INFORMATION ON THE PLACINGS FOR INVITED PLACEES ONLY

MEMBERS OF THE PUBLIC ARE NOT ELIGIBLE TO TAKE PART IN THE PLACINGS. THIS ANNOUNCEMENT, THIS APPENDIX AND THE TERMS AND CONDITIONS SET OUT HEREIN ARE FOR INFORMATION PURPOSES ONLY AND ARE DIRECTED ONLY AT PERSONS WHOSE ORDINARY ACTIVITIES INVOLVE THEM IN ACQUIRING, HOLDING, MANAGING AND DISPOSING OF INVESTMENTS (AS PRINCIPAL OR AGENT) FOR THE PURPOSES OF THEIR BUSINESS AND WHO HAVE PROFESSIONAL EXPERIENCE IN MATTERS RELATING TO INVESTMENTS AND ARE PERSONS WHO: (A) FALL WITHIN ARTICLE 19(5) OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL PROMOTION) ORDER 2005, AS AMENDED ('THE ORDER') OR ARE PERSONS FALLING WITHIN ARTICLE 49(2)(a) TO (d) ('HIGH NET WORTH COMPANIES, UNINCORPORATED ASSOCIATIONS, ETC') OF THE ORDER; AND (B) ARE QUALIFIED INVESTORS WITHIN THE MEANING OF SECTION 86(7) OF THE FINANCIAL SERVICES AND MARKETS ACT 2000, AS AMENDED ('FSMA'); AND (C) HAVE BEEN INVITED TO PARTICIPATE IN THE PLACINGS BY THE PLACING AGENTS (ALL SUCH PERSONS TOGETHER BEING REFERRED TO AS 'RELEVANT PERSONS').

THIS ANNOUNCEMENT AND THIS APPENDIX AND THE TERMS AND CONDITIONS SET OUT HEREIN MUST NOT BE ACTED ON OR RELIED ON BY PERSONS WHO ARE NOT RELEVANT PERSONS. ANY PERSON DISTRIBUTING THIS ANNOUNCEMENT AND THIS APPENDIX MUST SATISFY THEMSELVES THAT IT IS LAWFUL TO DO SO. ANY INVESTMENT OR INVESTMENT ACTIVITY TO WHICH THIS ANNOUNCEMENT AND THIS APPENDIX AND THE TERMS AND CONDITIONS SET OUT HEREIN RELATES IS AVAILABLE ONLY TO RELEVANT PERSONS AND WILL BE ENGAGED IN ONLY WITH RELEVANT PERSONS. THIS ANNOUNCEMENT AND THIS APPENDIX DO NOT THEMSELVES CONSTITUTE AN OFFER FOR SALE OR SUBSCRIPTION OF ANY SECURITIES IN THE COMPANY. THE SECURITIES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE US SECURITIES ACT OF 1933, AS AMENDED (THE 'US SECURITIES ACT') OR UNDER THE LAWS OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES, AND MAY NOT BE OFFERED, SOLD, RESOLD, TRANSFERRED OR DELIVERED, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, WITHIN THE UNITED STATES EXCEPT PURSUANT TO AN APPLICABLE EXEMPTION FROM OR IN A TRANSACTION NOT SUBJECT TO THE REGISTRATION REQUIREMENTS OF THE US SECURITIES ACT AND IN COMPLIANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES. NO MONEY, SECURITIES OR OTHER CONSIDERATION FROM ANY PERSON INSIDE THE UNITED STATES IS BEING SOLICITED BY THIS ANNOUNCEMENT AND THIS APPENDIX AND IF SENT IN RESPONSE TO INFORMATION CONTAINED IN THIS ANNOUNCEMENT OR THIS APPENDIX, WILL NOT BE ACCEPTED.

THIS ANNOUNCEMENT AND THIS APPENDIX IS ONLY ADDRESSED TO AND DIRECTED AT PERSONS IN MEMBER STATES OF THE EUROPEAN ECONOMIC AREA WHO ARE 'QUALIFIED INVESTORS' WITHIN THE MEANING OF ARTICLE 2(1)(E) OF THE PROSPECTUS DIRECTIVE. 

If a Placee indicates to the Placing Agents that it wishes to participate in the Placings by making an oral offer to acquire Placing Shares it will be deemed to have read and understood this Appendix and the announcement of which it forms part in their entirety (together with the Appendix, hereinafter, this 'Announcement') and the other Press Announcements, and to be making such offer on the terms and conditions, and to be providing the representations, warranties, indemnities, undertakings, agreements and acknowledgements, contained in this Announcement. In particular each such Placee represents, warrants and acknowledges that it is a Relevant Person and undertakes that it will acquire, hold, manage and dispose of any of the Placing Shares that are allocated to it for the purposes of its business only. Further, each such Placee represents, warrants and agrees that (a) if it is a financial intermediary, as that term is used in Article 3(2) of the Prospectus Directive, that the Firm Placing Shares and Open Offer Placing Shares acquired by it in the Firm Placing and Placing and Open Offer will not be acquired on a non-discretionary basis on behalf of, nor will they be acquired with a view to their offer or resale to, persons in circumstances which may give rise to an offer of securities to the public other than an offer or resale in a member state of the EEA which has implemented the Prospectus Directive to Qualified Investors, or in circumstances in which the prior consent of the Placing Agents has been given to each such proposed offer or resale; and (b) it is either (i) outside the United States and is acquiring the Firm Placing Shares and/or the Open Offer Placing Shares in an 'offshore transaction' within the meaning of Regulation S of the US Securities Act for its own account or is acquiring the Firm Placing Shares and/or the Open Offer Placing Shares for an account with respect to which it has confirmed it has the authority to acquire the Placing Shares and exercises sole investment discretion and who will sign and return the Regulation S form of acceptance in the Placing Letter which will be provided to each Placee by the Placing Agents which the Placee is obliged to complete and sign; or (ii) a 'qualified institutional buyer' (as defined in Rule 144A under the US Securities Act) or purchasing Placing Shares on behalf of a QIB, and who will sign and return the QIB form of acceptance in the Placing Letter. This Announcement does not constitute an offer to sell or issue or the invitation or solicitation of an offer to buy or acquire Placing Shares in any jurisdiction including, without limitation, the United StatesAustraliaCanadaNew Zealand or Switzerland or any other jurisdiction where such offer, sale or solicitation would be unlawful. This Announcement and the information contained herein are not for release, publication or distribution, directly or indirectly, in whole or in part, to persons in the United StatesAustraliaCanadaNew Zealand or Switzerland or any jurisdiction in which the same is unlawful. 

In particular, the Placing Shares referred to in this Announcement have not been and will not be registered under the US Securities Act and may not be offered, sold or transferred, directly or indirectly, into or within the United States except pursuant to an applicable exemption from, or in a transaction not subject to, the registration requirements of the US Securities Act. Subject to certain limited exceptions, no offering of the Placing Shares will be made in the United States. The Placing Shares have not been approved or disapproved by the US Securities and Exchange Commission, any state securities commission in the United States or any other regulatory authority in the United States, nor have any of the foregoing authorities passed upon or endorsed the merits of the offering of the Placings or the accuracy or adequacy of this Announcement. Any representation to the contrary is a criminal offence in the United States.

The distribution of this Announcement and the offer and/or placing of Placing Shares in certain other jurisdictions may be restricted by law. No action has been taken by the Placing Agents or the Company that would permit an offer of the Placing Shares or possession or distribution of this Announcement or any other offering or publicity material relating to the Placing Shares in any jurisdiction where action for that purpose is required. Persons into whose possession this Announcement comes are required by the Placing Agents and the Company to inform themselves about and to observe any such restrictions.

Each Placee's commitments will be made solely on the basis of the information set out in the Placing Letter and this Announcement. Each Placee, by participating in the Placings, agrees that it has neither received nor relied on any other information, representation, warranty or statement made by or on behalf of any of the Placing Agents or the Company and none of the Placing Agents, the Company or any person acting on such person's behalf nor any of their affiliates has or shall have liability for any Placee's decision to accept any invitation to participate in the Placings based on any other information, representation, warranty or statement. Each Placee acknowledges and agrees that it has relied on its own investigation on the business, financial or other position of the Company in accepting a participation in the Placings. Nothing in this paragraph shall exclude the liability of any person for fraudulent misrepresentation.

No representation or warranty, express or implied, is or will be made as to, or in relation to, and no responsibility or liability will be accepted by any of the Placing Agents or any of their respective employees, affiliates, advisers or agents or any other person as to or in relation to, the accuracy or completeness of the Prospectus or this Announcement or any other written or oral information made available to or publicly available to any Placee, any person acting on such Placee's behalf or any of their respective advisers, and any liability therefor is expressly disclaimed.

Proposed Firm Placing of Firm Placing Shares and Placing of Open Offer Placing Shares subject to clawback in respect of valid applications by Qualifying Shareholders.

Placees are referred to this Announcement, the other Press Announcements and the Prospectus, which the Company intends to publish once finalised, containing details of, inter alia, the Firm Placing and Placing and Open Offer. This Announcement and the Prospectus, have been prepared and issued, or will be issued, by the Company, and each of these documents is and will be the sole responsibility of the Company.

Subject to, amongst other conditions contained in the Underwriting Agreement, the Underwriters and the Company executing a Pricing Supplement following the institutional Bookbuild in connection with the Placings, Qualifying Shareholders on the Register at the Record Date will be offered the right to acquire at the Offer Price, payable in full on acceptance, their pro rata entitlement of the Open Offer Shares. Entitlements to fractions of Open Offer Shares will not be allotted and each Qualifying Shareholder's entitlement will be rounded down to the nearest whole number. The fractional entitlements will be aggregated and sold to the Placees in the Placing for the ultimate benefit of the Company.

Application for listing and admission to trading

Application will be made to (i) the UK Listing Authority for the New Ordinary Shares to be admitted to the Official List and (ii) the London Stock Exchange for the New Ordinary Shares to be admitted to trading on its main market for listed securities. Application will also be made to Euroclear UK & Ireland Limited for the entitlements to the Open Offer Shares to be admitted as separate participating securities within CREST. 

Subject to satisfaction of the conditions referred to herein and to be set out in the Prospectus, it is expected that the Application Form will be despatched on 16 June 2009 to Shareholders who hold their Ordinary Shares in certificated form (other than, subject to certain exceptions, shareholders in the United States and the Excluded Territories). It is expected that Open Offer Entitlements will be credited to stock accounts in CREST around 8.00 a.m. on 18 June 2009 to Qualifying Shareholders who hold their Ordinary Shares in uncertificated form (other than, subject to certain exceptions, shareholders in the United States and the Excluded Territories) and dealings in the New Ordinary Shares will commence at 8.00 a.m. on the day which is three Business Days following the General Meeting. The latest time and date for acceptance and payment in full in respect of the New Ordinary Shares is expected to be 11.00 a.m. on 2 July 2009. The Company and the Joint Sponsors have agreed that if a Supplementary Prospectus is issued by the Company two or fewer days prior to the date specified in the expected timetable for the Firm Placing and Placing and Open Offer as the latest date for acceptance and payment in full, such date shall be extended to the date which is three Dealing Days after the date of issue of the Supplementary Prospectus. 

The New Ordinary Shares will be issued subject to the memorandum and articles of association of the Company and will, when issued and fully paid, rank pari passu in all respects with the Existing Ordinary Shares, (including the right to receive all dividends or other distributions declared after the date of the issue of the New Ordinary Shares).

Bookbuild

Commencing today, the Placing Agents will be conducting the Bookbuild to determine demand for participation in the Placings. The Placing Agents will seek to procure Placees as part of this Bookbuild. This Announcement gives details of the terms and conditions of, and the mechanics of participation in, the Bookbuild and Placings. A commission of 1.75 per cent. of the value of the Open Offer Placing Shares initially allocated to each Placee by the Placing Agents will be paid by the Placing Agents on behalf of the Company to such Placee on the date of Admission subject to payment in full by such Placee for the Firm Placing Shares and any Open Offer Placing Shares allocated to such Placee in accordance with this Announcement and such Placee's Placing Letter.  

Any commission payable will be paid to a Placee only if the Underwriters' obligations under the Underwriting Agreement become unconditional in all respects and the Underwriting Agreement is not terminated in accordance with its terms prior to Admission. Any commission payable shall only be paid to the extent received by the Placing Agents from the Company. The Placing Agents shall have no liability to pay any commission to the extent that such commission is not received by the Placing Agents from the Company and, accordingly, a Placee's commission may in certain circumstances be reduced proportionately or eliminated.

Principal terms of the Bookbuild

a)    By participating in the Bookbuild and the Placings, Placees will be deemed to have read and understood this Announcement and the other Press Announcements in their entirety and to be participating and making an offer for any Placing Shares on the terms and conditions, and to be providing the representations, warranties, indemnities, acknowledgements and undertakings, contained in this Announcement and pursuant to the Placing Letter.

b)    The Placing Agents are arranging the Placings as agents of the Company. 

c)    Participation in the Placings will only be available to persons who may lawfully be and are invited to participate by the Placing Agents. The Placing Agents and their respective affiliates are entitled to enter bids as principal in the Bookbuild. 

d)    Any bid should state the total number of Placing Shares which the person wishes to acquire or the total monetary amount which it is offering to acquire Placing Shares at the Offer Price which is ultimately established by the Company and the Underwriters, or at a price up to a price limit specified in its bid.

e)    The Placing Agents reserve the right not to accept bids or to accept bids in part rather than in whole. The acceptance of bids shall be at the Placing Agents' absolute discretion.

f)    The Bookbuild will establish a single price for the Firm Placing Shares, the Open Offer Placing Shares and the Open Offer Shares. The Offer Price will be jointly agreed between the Placing Agents and the Company following completion of the Bookbuild and will be payable to the Placing Agents by the Placees in respect of the Placing Shares allocated to them. Any discount to the market price of the Ordinary Shares will be determined in accordance with the Listing Rules as published by the FSA pursuant to Part IV of FSMA, and subject to approval by Shareholders of the Company at the General Meeting.

g)    The Bookbuild is expected to close no later than 4.30 p.m. on 15 June 2009. The timing of the closing of the books, pricing and allocations is at the discretion of the Placing Agents and the Company. The Placing Agents may, at their sole discretion, accept bids that are received after the Bookbuild has closed.

h)    If successful, each Placee's allocation will be confirmed to it by the Placing Agents following the close of the Bookbuild, and a Placing Letter will be dispatched as soon as possible thereafter. Oral or written confirmation (at the Placing Agents' discretion) from the Placing Agents to such Placee, following completion of the Bookbuild, will constitute a legally binding commitment upon such Placee, in favour of the Placing Agents and the Company to acquire the number of Placing Shares on the terms and conditions set out in this Announcement, the Placing Letter and in accordance with the Company's Memorandum and Articles. Each Placee will confirm such legally binding commitment by completing, signing and returning a Placing Letter in accordance with the instructions therein, and should a Placee fail to do so the Placing Agents will retain the right to cancel their allocation or terminate such legally binding commitment. Each Placee will have an immediate, separate, irrevocable and binding obligation, owed to the Placing Agents to pay to the Placing Agents (or as the Placing Agents may direct) in cleared funds an amount equal to the product of the Offer Price and the sum of the number of Firm Placing Shares and once apportioned (in accordance with the procedure described in the paragraph entitled 'Placing Procedure' below), the Open Offer Placing Shares, which such Placee has agreed to acquire.

i)    The Company will make a further announcement following the close of the Bookbuild detailing the Offer Price and the number of New Ordinary Shares to be issued (the 'Pricing Announcement'). It is expected that the Pricing Announcement will be made as soon as practicable after the close of the Bookbuild.

j)    A bid in the Bookbuild will be made on the terms and conditions in this Announcement and will be legally binding on the Placee by which, or on behalf of which, it is made and will not be capable of variation or revocation after the close of the Bookbuild.

k)    Subject to paragraphs (g) and (i) above, the Placing Agents may choose to accept bids, either in whole or in part, on the basis of allocations determined at its discretion and may scale down any bids for this purpose on such basis as they may determine.

l)    Irrespective of the time at which a Placee's allocation(s) pursuant to the Placings is/are confirmed, settlement for all Placing Shares to be acquired pursuant to the Placings will be required to be made at the same time, on the basis explained below under the paragraph 'Registration and Settlement'.

All obligations under the Placings will be subject to the fulfilment of the conditions referred to below under the paragraph 'Conditions of the Placings and Termination of the Underwriting Agreement'.

Conditions of the Placings and Termination of the Underwriting Agreement

Placees will only be called on to acquire Placing Shares if the obligations of the Underwriters under the Underwriting Agreement have become unconditional in all respects and the Underwriters have not terminated the Underwriting Agreement prior to Admission.

The Underwriters' obligations under the Underwriting Agreement are conditional upon, inter alia:

·         the Company having complied with all of its undertakings, covenants and obligations under the Underwriting Agreement to the extent that they fall to be performed or satisfied prior to Admission save where the Underwriters have either waived any non-compliance with such undertakings, covenants and obligations or where they consider that any non-compliance is not (singly or in the aggregate) (i) material in the context of the Company’s group (taken as a whole), the Placings, the Open Offer, the underwriting of the New Ordinary Shares, Admission or dealings in the Company’s ordinary shares in the period after Admission or (ii) such as to make it impracticable, inappropriate or inadvisable to it or them to proceed with the Placings, the Open Offer, the underwriting of the New Ordinary Shares, Admission or dealings in the Company’s ordinary shares in the period after Admission;
·         the warranties on the part of the Company contained in the Underwriting Agreement being, in the opinion of the Underwriters (acting in good faith), true and accurate in all respects and not misleading on and as of: (i) the date of the Underwriting Agreement, (ii) the date of publication of the Prospectus; and (iii) save to an extent that, in the opinion of the Underwriters, acting in good faith, is not material in the context of the Company’s group (taken as a whole), the Placings, the Open Offer, the underwriting of the New Ordinary Shares, Admission or dealings in the Company’s ordinary shares in the period after Admission: (A) on the date of publication of any Supplementary Prospectus; and (B) the date of Admission, in each case as though they had been given and made on such dates by reference to the facts and circumstances then existing;
·         Admission having occurred by not later than 8.00 a.m. on the date that is 15 dealing days after the date of publication of the Prospectus (or, if earlier, the date for Admission as set out in the Prospectus) or such other date as the Company and the Underwriters may agree in writing as the proposed date for Admission, being not later than one week after such date;
·         the requisite resolutions having been passed (without amendment other than to correct a manifest error in compliance with all applicable laws) at the General Meeting;
·         the Offer Price and the number of New Ordinary Shares being agreed by the Company and the Underwriters and the Pricing Supplement being executed by the Company and the Underwriters (such execution in their absolute discretion) by no later than 6.00 p.m. on the date of execution of the Underwriting Agreement (or such later date and/or time as the Company and the Underwriters may agree),

(all such conditions included in the Underwriting Agreement being together the 'Conditions'). 

The Underwriters may terminate the Underwriting Agreement at any time before Admission or on the occurrence of certain events, including, (i) in the opinion of an Underwriter there has been a material adverse effect, (ii) in the opinion of an Underwriter, in its sole judgment (acting in good faith), any of the warranties given by the Company at the dates specified in the Conditions is not true, accurate and not misleading, (iii) an Underwriter becomes aware that the Prospectus or other document relevant to the Placings and the Open Offer (or any amendment or supplement thereto) is or has become untrue, inaccurate or misleading, (iv) a force majeure event as specified in the Underwriting Agreement has occurred, or (v) the application of the Company for Admission is withdrawn or is refused by the FSA or the London Stock Exchange for any reason. 

If any Condition has not been satisfied (or waived by the Underwriters) or becomes incapable of being satisfied or if the Underwriting Agreement is terminated, all obligations under these terms and conditions and/or any Placing Letters will automatically terminate. By participating in the Bookbuild and the Placings, each Placee agrees that its rights and obligations hereunder are conditional upon the Underwriting Agreement becoming unconditional in all respects and that its rights and obligations will terminate only in the circumstances described above and will not be capable of rescission or termination by it after oral or written confirmation by the Underwriters (at the Underwriters' discretion) following the close of the Bookbuild.

The Underwriters may in their absolute discretion extend the time or date for satisfaction of any Condition or (where permitted) waive the satisfaction of any Condition (in whole or in part). Any such extension or waiver will not affect Placees' commitments as set out in this Announcement. Neither of the Underwriters nor the Company shall have any liability to any Placee (or to any other person whether acting on behalf of a Placee or otherwise) in respect of any decision made as to whether or not to waive or to extend the time and/or date for the fulfilment of any Condition.

By participating in the Placings each Placee agrees that the exercise by the Company or the Underwriters of any right or other discretion under the Underwriting Agreement shall be within the absolute discretion of the Company and the Underwriters (as the case may be) and that neither the Company nor the Underwriters need make any reference to such Placee and that neither the Company nor the Underwriters shall have any liability to such Placee (or to any other person whether acting on behalf of a Placee or otherwise) whatsoever in connection with any such exercise.

Withdrawal Rights

Placees acknowledge that their acceptance of any of the Firm Placing and Placing and Open Offer is not by way of acceptance of the public offer to be made in the Prospectus and Application Forms but is by way of a collateral contract and as such section 87Q of the FSMA does not entitle Placees to withdraw in the event that the Company publishes a Supplementary Prospectus in connection with the Firm Placing and Placing and Open Offer. If, however, a Placee is entitled to withdraw, by accepting the offer of a placing participation, the Placee agrees to confirm their acceptance of the offer on the terms contained in the Placing Letter on the same terms immediately after such right of withdrawal arises.

Placing Procedure

Any Open Offer Shares offered pursuant to the Firm Placing and Placing and Open Offer and not subject to valid applications from Qualifying Shareholders received by 11.00 a.m. on 2 July 2009 (or such other time and/or date as the Company and the Placing Agents may agree), or if not otherwise deemed to be valid in accordance with the Prospectus, will be deemed to have been declined and the entitlement of Qualifying Shareholders to such shares will lapse.

Placees shall acquire the Firm Placing Shares and any Open Offer Placing Shares and the number of Firm Placing Shares and any allocation of Open Offer Placing Shares will be notified to them by 5 p.m. on 3 July 2009.

Placees will be called upon to acquire, and shall acquire, the Open Offer Placing Shares only if valid applications from Qualifying Shareholders for such shares have not been received by 11.00 a.m. on 2 July 2009, or if applications have otherwise not been deemed to be valid in accordance with the Prospectus, and any allocation of the Open Offer Placing Shares to Placees will be notified to them by no later than 5 p.m. on the date of the General Meeting.

Payment in full for any Firm Placing Shares and Open Offer Placing Shares so allocated at the Offer Price must be made by no later than midday (or such other time as shall be notified to each Placee by the relevant Placing Agent) on the date of Admission. The Placing Agents will notify Placees if any of the dates in this Announcement should change as a result of delay in the posting of the Prospectus, the Application Form, the crediting of the New Ordinary Shares in CREST, the production of a supplementary prospectus or otherwise.

Registration and Settlement 

Settlement of transactions in the Placing Shares following Admission will take place within the CREST system, subject to certain exceptions. The Placing Agents and the Company reserve the right to require settlement for and delivery of the Placing Shares to Placees by such other means that they deem necessary if delivery or settlement is not possible within the CREST system within the timetable set out in this Announcement or would not be consistent with the regulatory requirements in the Placee's jurisdiction. Each Placee will be deemed to agree that it will do all things necessary to ensure that delivery and payment is completed in accordance with either the standing CREST or certificated settlement instructions which they have in place with the relevant Placing Agent.

Each Placee allocated any Firm Placing Shares and conditionally allocated any Open Offer Placing Shares in the Placings will be sent a Placing Letter confirming the contract concluded upon acceptance of such Placee's earlier oral offer and also confirming the number of Firm Placing Shares and Open Offer Placing Shares conditionally allocated to it, the Offer Price and the aggregate amount owed by such Placee to the Placing Agents. Settlement is expected to take place on 6 July 2009. Each Placee is deemed to agree that if it does not comply with these obligations, the Placing Agents may sell any or all of the Placing Shares allocated to it on its behalf and retain from the proceeds, for its own account and benefit, an amount equal to the aggregate amount owed by the Placee plus any interest due. By communicating a bid for Placing Shares, each Placee confers on the Placing Agents all such authorities and powers necessary to carry out any such sale and agrees to ratify and confirm all actions which the Placing Agents lawfully take in pursuance of such sale.

The relevant Placee will, however, remain liable for any shortfall below the aggregate amount owed by it and may be required to bear any stamp duty or stamp duty reserve tax (together with any interest or penalties) which may arise upon any transaction in the Placing Shares on such Placee's behalf.

If Placing Shares are to be delivered to a custodian or settlement agent, Placees should ensure that the Placing Letter is copied and delivered immediately to the relevant person within that organisation. 

Acceptance

By participating in the Placings and/or completing (as applicable), signing and returning the appropriate version of the Forms of Acceptance attached to the Placing Letter, a Placee:

·         undertakes to acquire at the Offer Price any New Ordinary Shares comprised in its placing participation;
·         undertakes to perform its obligations under the Placing Letter, including, without limitation, to make payment for the New Ordinary Shares in accordance with the Placing Letter on the due time and date set out in the Placing Letter;
·         confirms that in giving its oral commitment to take up its placing participation, it has not relied on any information given or any representations or statements made at any time by any person in connection with Admission, the Placings, the Open Offer, the Company, the New Ordinary Shares or otherwise, other than the information contained in this Announcement and the other Press Announcements and the Placing Letter and that in accepting the offer of its placing participation it has relied solely on the information contained in this Announcement and the other Press Announcements;
·         confirms that it has received, read and understood the contents of the Prospectus (including the information incorporated by reference therein);
·         acknowledges and accepts that the content of this Announcement and the other Press Announcements and the Prospectus is exclusively the responsibility of the Company and that none of the Placing Agents, nor any of their respective affiliates nor any person acting on behalf of any of such persons will be responsible for or shall have liability for any information, representation or statement contained therein, and none of the Placing Agents, or any of their respective affiliates or any person acting on behalf of any of such persons will be responsible or liable for that Placee’s decision to accept its placing participation based on any information, representation or statement contained in this Announcement and the other Press Announcements or the Prospectus;
·         confirms that it has made its own assessment of the Company and the New Ordinary Shares and has relied on its own investigation of the business, financial or other position of the Company in confirming its agreed placing participation;
·         confirms that (i) it has not relied on, and will not rely on, any information relating to the Company contained or which may be contained in any research reports prepared or which may be prepared by any of the Placing Agents or any of their affiliates; (ii) none of the Placing Agents, their affiliates or any person acting on behalf of any of such persons has or shall have any responsibility or liability for public information relating to the Company; (iii) none of the Placing Agents, their affiliates or any person acting on behalf of any of such persons has or shall have any responsibility or liability for any additional information that has otherwise been made available to that Placee, whether at the date of publication of such information, the date of this letter or otherwise; and that (iv) none of the Placing Agents, their affiliates or any person acting on behalf of any of such persons makes any representation or warranty, express or implied, as to the truth, accuracy or completeness of any such information referred to in (i) to (iii) above, whether at the date of publication of such information, the date of the Placing Letter or otherwise;
·         confirms that it has taken or will take all appropriate action required under the Proceeds of Crime Act 2002 and has complied with the Money Laundering Regulations 2007 and any other applicable legislation concerning prevention of money laundering (the “Regulations”) and, if it is making payment on behalf of a third party, it has obtained and recorded satisfactory evidence to verify the identity of the third party as may be required by the Regulations;
·         acknowledges and accepts that any of the Underwriters may, subject to the terms of the Underwriting Agreement and in accordance with applicable legal and regulatory provisions, engage in transactions in relation to the New Ordinary Shares or the Ordinary Shares and/or related instruments for their own account for the purpose of hedging their underwriting exposure or otherwise and, except as required by applicable law or regulation, the Underwriters will not make any public disclosure in relation to such transactions;
·         represents and warrants that it is (i) if in the UK, a person of a kind described in articles 19(5) or 49(2) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) and (ii) entitled to acquire the New Ordinary Shares comprised in its placing participation under the laws of all relevant jurisdictions which apply to it and that it has fully observed such laws and obtained all governmental and other consents which may be required thereunder and complied with all necessary formalities;
·         confirms that it does not expect the Placing Agents to have any duties or responsibilities towards it for providing protections afforded to clients under the Rules of the Financial Services Authority (the “Rules”) or advising it with regard to the New Ordinary Shares and confirms that it is not, and will not be, the client of any such person as defined by the Rules. Likewise, any payment by it will not be treated as client money governed by the Rules;
·         acknowledges and accepts that the Underwriters: (i) have absolute discretion: (A) acting jointly, as to whether to enforce, waive, vary or extend the time for the exercise of any conditions, obligations, undertakings, representations or warranties in the Underwriting Agreement; and (B) acting separately and in good faith, as to whether to terminate their respective obligations under the Underwriting Agreement; (ii) shall have no obligation to: (A) consult with it; or (B) act in furtherance of or otherwise take its interests into account; or (C) seek its consent in each case; regarding any determination whether to take any of the steps set out in sub-clause (i) above or to exercise any other right or discretion given to them or which they are entitled to exercise whether under the Underwriting Agreement or otherwise. A Placee further acknowledges and accepts, for the avoidance of doubt, but without limiting the generality of the foregoing, that neither the Company nor the Placing Agents shall be under any obligation to refresh its placing participation in the event that the Underwriters decide to take any of the steps set out in sub-clause (i) above or decide to exercise any other right or discretion given to them or which they are entitled to exercise whether under the Underwriting Agreement or otherwise; and (ii) are entitled to act in furtherance of and otherwise take into account their own interests when determining whether to take, or taking, any of the steps set out in sub-clause (i) above or deciding whether to exercise, or exercising, any other right or discretion given to them or which they are entitled to exercise whether under the Underwriting Agreement or otherwise; and (iii) are not acting in a fiduciary or advisory capacity with respect to it or its interests and, as such, owe no obligations of any nature whatsoever, other than those expressly set out in the Placing Letter; and (iv) shall have no liability to it in relation to the taking of any of the steps set out in sub-clause (v) above or the exercise of any other right or discretion given to them or which they are entitled to exercise whether under the Underwriting Agreement or otherwise (other than liability arising out of the fraud or wilful default of the Underwriters);
·         represents and warrants that it is not, and it is not applying as nominee(s) or agent(s) for, a person/person(s) who is (are) or may be a person mentioned in sections 67, 70, 93 and 96 of the Finance Act 1986 (depositary receipts and clearance services);
·         represents and warrants if it is in the European Economic Area, that it is a qualified investor as defined in section 86(7) of the FSMA, as amended, being a person falling within Articles 2.1(e)(i), (ii) or (iii) of Directive 2003/71/EC;
·         undertakes that (i) if it is outside the United States purchasing New Ordinary Shares in an “offshore transaction” within the meaning of Regulation S under the US Securities Act, that it will sign and return a Regulation S form of acceptance or (ii) if it is a QIB or purchasing New Ordinary Shares on behalf of a QIB, that it will sign and return a QIB form of acceptance; and
·         agrees to indemnify on an after tax basis and hold harmless the Company, the Placing Agents, their respective affiliates and any other person acting on behalf of any of such persons from and against any and all costs, claims, liabilities and expenses (including legal fees and expenses): (i) arising out of or in connection with any breach of the agreements, acknowledgements, representations, warranties and undertakings in the Placing Letter; and (ii) incurred by the Placing Agents arising from the performance of that Placee’s obligations under the Placing Letter, and further agrees that certain provisions of this Announcement and the Placing Letter shall survive completion of the Placings and Open Offer.

Please also note that the agreement to allot and issue Placing Shares to Placees (or the persons for whom Placees are contracting as agent) free of stamp duty and stamp duty reserve tax in the UK relates only to their allotment and issue to Placees, or such persons as they nominate as their agents, direct from the Company for the Placing Shares in question. Such agreement assumes that such Placing Shares are not being acquired in connection with arrangements to issue depositary receipts or to transfer such Placing Shares into a clearance service. If there were any such arrangements, or the settlement related to other dealing in such Placing Shares, stamp duty or stamp duty reserve tax may be payable, for which neither the Company nor the Placing Agents would be responsible. If this is the case, it would be sensible for Placees to take their own advice and they should notify the relevant Placing Agent accordingly. In addition, Placees should note that they will be liable for any capital duty, stamp duty and all other stamp, issue, securities, transfer, registration, documentary or other duties or taxes (including any interest, fines or penalties relating thereto) payable outside the UK by them or any other person on the acquisition by them of any Placing Shares or the agreement by them to acquire any Placing Shares.

Selling Restrictions 

In taking up an allocation of a placing participation a Placee:

·         represents and warrants that it is not a person who has a registered address in, or is a resident, citizen or national of, a country or countries in which it is unlawful to make or accept an offer to acquire New Ordinary Shares;
·         confirms that it is a person whose ordinary activities involve it (as principal or agent) in acquiring, holding, managing or disposing of investments for the purpose of its business and it undertakes that it will (as principal or agent) acquire, hold, manage or dispose of the New Ordinary Shares comprising its placing participation for the purposes of its business;
·         acknowledges that none of the New Ordinary Shares has been or will be registered under the US Securities Act or with any securities regulatory authority of any state or other jurisdiction of the United States;
·         acknowledges that the New Ordinary Shares may not be offered, sold, taken up, resold, transferred or delivered, directly or indirectly, in whole or in part, into or within the United States (as defined in Regulation S under the US Securities Act) except pursuant to an applicable exemption from, or in a transaction not subject to, the registration requirements of the US Securities Act and in compliance with any applicable securities laws of any state or other jurisdiction of the United States;
·         confirms that it is either: (i) not a person located in the United States (as defined in Regulation S under the US Securities Act) and purchasing in an offshore transaction pursuant to Regulation S under the US Securities Act; or (ii) a “qualified institutional buyer” (a “QIB”) as defined in Rule 144A under the US Securities Act (“Rule 144A”) and acknowledges (or, if it is acting on behalf of another person, such person is a QIB and has confirmed it acknowledges) that the New Ordinary Shares are “restricted securities” within the meaning of Rule 144(a)(3) of the US Securities Act, and agrees, on its own behalf and on behalf of any accounts for which it is acting, that, for so long as the New Ordinary Shares are “restricted securities”, it will not deposit the New Ordinary Shares into any unrestricted depositary facility established or maintained by a depositary bank and it will only transfer the New Ordinary Shares: (A) in an offshore transaction in accordance with Rule 903 or 904 of Regulation S under the US Securities Act; (B) in a transaction not involving any general solicitation or general advertising pursuant to Rule 144A; (C)pursuant to Rule 144 under the US Securities Act (if available); or (D) pursuant to an effective registration statement under the US Securities Act, and in each case in accordance with any applicable securities laws of the United States and any state or other jurisdiction of the United States;
·         confirms that it is not registered and is not required to be registered as a broker or a dealer under the US Securities Exchange Act of 1934, as amended, and that it has not been granted, nor shall it accept, any selling concession, discount or other allowance from a participant in the Placings that is a member of the Financial Industry Regulatory Authority, Inc;
·         acknowledges that the Placing Agents may utilise the services of one or more affiliates that are US-registered broker-dealers to effect the transactions contemplated hereby, but any such broker-dealer will be acting solely as agent and not as principal in connection with such transactions and will have no responsibility or liability to it or the Placing Agents arising from any failure by either of them to pay or perform any obligation in connection with the Placing Letter or any such transaction;
·         it has (i) fully observed the laws of all relevant jurisdictions which apply to it, (ii) obtained all governmental and other consents which may be required and complied with all relevant formalities, and (iii) not taken any action (including without limitation the acceptance of its placing participation) which will or may result in the Company or the Placing Agents (or any of them) being in breach of a legal or regulatory requirement of any territory in connection with the Placings and Open Offer and the other arrangements described in the Placing Letter and that it has obtained all other necessary consents and authorities required to enable it to give its commitment to acquire the relevant New Ordinary Shares and to perform its obligations under the terms of the Placing Letter;
·         represents, warrants and undertakes that it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) relating to the New Ordinary Shares in circumstances in which section 21(1) of FSMA does not require approval of the communication by an authorised person;
·         represents, warrants and undertakes that it has complied and will comply with the selling restrictions set out in the Prospectus and all other applicable laws and regulations in relation to the Placings and the Open Offer, the underwriting of the New Ordinary Shares and Admission;
·         acknowledges that it, or the person specified by it for registration as a holder of New Ordinary Shares, will be liable for any transfer taxes in accordance with the provisions mentioned under “Acceptance” above; and
·         in relation to each member state of the European Economic Area which has implemented the Prospectus Directive (each a Relevant Member State), represents, warrants and undertakes that it has not made and will not make an offer to the public of any New Ordinary Shares in that Relevant Member State other than the offers contemplated by the Prospectus in the United Kingdom once the Prospectus has been approved by the FSA and published in accordance with the Prospectus Rules, except that it may make an offer to the public in that Relevant Member State of any New Ordinary Shares at any time under the following exemptions under the Prospectus Directive if they have been implemented in that Relevant Member State: (i) to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities; (ii) to any legal entity which has two or more of (i) an average of at least 250 employees during the last financial year; (ii) a total balance sheet of more than €43,000,000 and (iii) an annual net turnover of more than €50,000,000 as shown in its last annual or consolidated accounts; or (iii) in any other circumstances falling within Article 3(2) of the Prospectus Directive, subject to obtaining the Company’s and the Placing Agents’ prior consent, provided no such offer of New Ordinary Shares shall result in a requirement for the publication by the Company or the Placing Agents of a prospectus pursuant to Article 3 of the Prospectus Directive.

Miscellaneous

If a Placee is entitled to participate in the Open Offer by virtue of being a Qualifying Placee it will be able to apply to acquire Open Offer Shares under the Open Offer. Any participation by a Qualifying Placee in the Open Offer will not reduce its commitment in respect of the Firm Placing Shares and Open Offer Placing Shares that make up that Placee's placing participation. The Company reserves the right to treat as invalid any application or purported application for Open Offer Shares that appears to the Company or its agents to have been executed, effected or dispatched in or from the United States or an Excluded Territory or in a manner that may involve a breach of the laws or regulations of any jurisdiction or if the Company or its agents believe that the same may violate applicable legal or regulatory requirements or if it provides an address for delivery of the share certificates of Open Offer Shares or in the case of a credit of Open Offer Entitlements to a stock account in CREST, to a CREST member whose registered address would be in an Excluded Territory or the United States, or any other jurisdiction outside the United Kingdom in which it would be unlawful to deliver such share certificates of make such a credit.

No portion of a Placee's placing participation may be offset through any acquisition of New Ordinary Shares by any other means. From and including the date of the Placing Letter to and including the date of Admission, a Placee shall, and shall procure that its affiliates shall, not enter into any transaction involving the Ordinary Shares or securities or derivatives relating to the Company's ordinary shares (other than derivatives referencing a sector or market index in which the Company's ordinary shares do not exceed 15 per cent. of the weighting of any such index) that has the economic effect of a short sale of the Company's ordinary shares or of hedging or otherwise mitigating the economic risk associated with its placing participation. Without prejudice to the foregoing sentence, the foregoing restrictions do not apply to (i) transactions to facilitate client orders from clients that are not affiliates (other than any independently run asset management affiliates); (ii) transactions constituting ordinary course market marking activity; (iii) proprietary positions in the Company's securities or derivatives relating to the Company's securities entered into by you prior to the making of any commitment to participate in the Placings; and (iv) any transaction undertaken by an independently run asset management affiliate yours, and any such transactions shall be undertaken in compliance with applicable securities laws and regulations.

Each Placee agrees to provide the Placing Agents with such relevant documents as they may reasonably request to comply with requests or requirements from the Placing Agents resulting from requests that the Company may receive from relevant regulators in relation to the Placings, subject to its legal, regulatory and compliance requirements and restrictions.

Times

Unless the context otherwise requires, all references to time are to London time. All times and dates in this Announcement may be subject to amendment. The Placing Agents will notify Placees and any persons acting on behalf of the Placees of any changes.

APPENDIX IV

DEFINITIONS

The definitions set out below apply throughout this announcement, unless the context requires otherwise.

''2006 financial year''

the 53 weeks ended 19 August 2006;

''2007 financial year''

the 53 weeks ended 18 August 2007;

'2008 financial year'

the 53 weeks ended 23 August 2008; 

'2009 financial year'

the 52 weeks ending 22 August 2009;

'2009 Interim Results'

the half-yearly report of the Group containing the unaudited interim condensed consolidated financial statements of the Group and the independent review report thereon for the 28 weeks ended 7 March 2009;

'Admission'

admission of the Open Offer Shares to the Official List and to trading on the main market for listed securities of the London Stock Exchange;

'Announcement'    

this announcement and its Appendices;

'Annual Reports and Financial Statements'

means the audited and consolidated annual report and financial statements (including relevant accounting policies and notes) of the Group and audit report thereon for the years ended 23 August 2008, 18 August 2007 and 19 August 2006; 

'Application Form'    

the personalised application form on which Qualifying Non CREST Shareholders may apply for Open Offer Shares under the Open Offer;

'Articles of Association' or 'Articles'    

the articles of association of the Company;

'Board'

the board of directors of the Company from time to time;

'Bondholders'

the holders of the Convertible Bonds from time to time;

'Bookbuild'    

the process through which the Placing Agents will determine the demand for the Placing Shares and the Offer Price;

'Business Day'

any day on which banks are generally open in London for the transaction of business other than a Saturday or Sunday or public holiday;

'certificated' or 'in certificated form'

a share or other security which is not in uncertificated form (that is, not in CREST);

'Closing Price'

the closing, middle market quotation of an Ordinary Share, as published in the Daily Official List;

'Companies Act 1985'

the Companies Act of England and Wales 1985, as amended; 

'Conditional Placees'

those investors (if any) to whom Open Offer Shares not taken up by Qualifying Shareholders in the Open Offer are to be placed;

'Convertible Bond Tender'

the convertible bond tender to be described in the Prospectus; 

'Convertible Bonds'

the 5.0 per cent. convertible bonds issued by Punch Taverns (Redwood Jerseyco) Limited on 14 December 2005 in principal amount of £275.0 million; 

'CREST'

the system for the paperless settlement of trades in securities and the holding of uncertificated securities in accordance with the CREST Regulations operated by Euroclear UK;

'CREST Regulations'

the Uncertificated Securities Regulations 2001 (SI 2001 No. 3755), as amended from time to time;

'Daily Official List'

the daily official list of the London Stock Exchange;

'Dealing Day'    

a day on which dealings in domestic equity market securities may take placing on the London Stock Exchange;

'Directors' 

the directors of the Company at the date of this document, and 'Director' means any one of them;

'Disclosure and Transparency Rules'

the disclosure rules and transparency rules made under Part VI of FSMA (as set out in the FSA Handbook), as amended;

'Excluded Shareholders'

subject to certain exceptions, Shareholders who have registered addresses in, who are incorporated in, registered in or otherwise resident or located in, the United States or any Excluded Territory;

'Excluded Territories'

Australia, Canada, New Zealand, Switzerland and any other jurisdiction where the extension or availability of the Firm Placing and the Placing and Open Offer (and any other transaction contemplated thereby) would breach any applicable law or regulation;

'Ex-Entitlements Date'

8.00 a.m. on 16 June 2009;

'Existing Ordinary Shares'

in relation to a particular date, the Ordinary Shares existing as at that date; 

'Firm Placees'

those persons with whom Firm Placing Shares are to be placed;

'Firm Placing'

the placing of New Ordinary Shares with the Firm Placees;

'Firm Placing Shares'

New Ordinary Shares which are the subject of the Firm Placing;

'FSA' or 'Financial Services Authority'

the Financial Services Authority of the United Kingdom;

'FSMA'

the Financial Services and Markets Act 2000, as amended;

'General Meeting'

the general meeting of the Company to be convened pursuant to the Notice;

'Goldman Sachs International'

Goldman Sachs International of Peterborough Court133 Fleet StreetLondon EC4A 2BB;

'Group'

the Company together with its subsidiaries and subsidiary undertakings;

'IMS Announcement'

the press announcement issued by the Company on 15 June 2009 containing its interim management statement for the 40 weeks ending on 30 May 2009;

'Joint Bookrunners'

Goldman Sachs International and Merrill Lynch International;

'Joint Sponsors'

Goldman Sachs International and Merrill Lynch International;

'Listing Rules'

the listing rules made under Part VI of FSMA (as set out in the FSA Handbook), as amended;

'London Stock Exchange'

London Stock Exchange plc or its successor(s);

'Merrill Lynch International'

Merrill Lynch International of Merrill Lynch Financial Centre, 2 King Edward StreetLondon EC1A 1HQ;

'Memorandum of Association' or 'Memorandum'    

the memorandum of association of the Company;

'New Ordinary Shares'

the Firm Placing Shares and/or the Open Offer Shares, as the context requires;

'Notice'

the notice convening the General Meeting, to be set out at the end of the Prospectus;

'Offer Price'

the price determined by the Joint Sponsors and the Company for each Open Offer Share and for each Firm Placing Share;

'Official List'

the official list of the UK Listing Authority;

'Open Offer'

the offer to certain Qualifying Shareholders to apply for the Open Offer Shares on the terms and subject to the conditions to be set out in the Prospectus and, in the case of Qualifying Non-CREST Shareholders, in the Application Form;

'Open Offer Entitlement'

the entitlement of a Qualifying Shareholder, pursuant to the Open Offer, to apply to subscribe for Open Offer Shares pursuant to the Open Offer;

'Open Offer Placing Shares'

the Open Offer Shares to be offered to the Placees in the Placing;

'Open Offer Shares'

New Ordinary Shares to be offered to Qualifying Shareholders pursuant to the Open Offer;

'Ordinary Shares'

the ordinary shares of 0.04786 pence each in the capital of the Company;

'Overseas Shareholders'

Shareholders with registered addresses outside the UK or who are, incorporated in, registered in or otherwise resident or located in, countries outside the UK;

'Placee' or 'Placees'    

a person that applies to participate in the Placings;

'Placing'

the conditional placing of Open Offer Shares as described in this Announcement and subject to clawback in respect of valid applications for Open Offer Shares by Qualifying Shareholders under the Open Offer;

'Placing Agents'


Goldman Sachs International and Merrill Lynch International, in their capacity as Placing Agents in respect of the Placings;

'Placing and Open Offer'

the placing of the Open Offer Shares with Conditional Placees subject to clawback under the Open Offer, and the Open Offer;

 'Placing Letter'    


the letter which will be provided to each Placee by the Placing Agents by which Placees make required representations, warranties, indemnities, acknowledgements and undertakings, which the Placee is obliged to complete and sign as formal acceptance of its allocation in the Placings;

'Placing Shares'

the Firm Placing Shares and the Open Offer Placing Shares;

'Placings'

the Firm Placing and the Placing;

'pounds' or '£' or 'pounds sterling'

the lawful currency of the United Kingdom;

'Press Announcements'    

the IMS Announcement and the Pricing Announcement;

'Pricing Announcement'    


the press announcement to be issued by the Company containing details, inter alia, of the Offer Price;

'Pricing Supplement'

the pricing supplement proposed to be executed by the Company and the Placing Agents confirming the Offer Price and the number of New Ordinary Shares;

'Prospectus' 

the document comprising a prospectus relating to the Company for the purpose of the Firm Placing and the Placing and Open Offer (together with any supplements or amendments thereto);

'Prospectus Rules'

the prospectus rules made under Part VI of FSMA (as set out in the FSA Handbook), as amended;

'Punch A Securitisation' 

means the securitisation of the whole business of Punch Taverns Holdings Limited and certain of its subsidiaries through the issue of fixed and floating rate notes by Punch Taverns Finance plc; 

'Punch B Securitisation' 

means the securitisation of the whole business of Punch Taverns (PMH) Limited and certain of its subsidiaries through the issue of fixed and floating rate notes by Punch Taverns Finance B Limited;

'Punch' or 'the Company'

Punch Taverns plc, a company incorporated in England and Wales with registered number 03752645, whose registered office is at Jubilee House, Second Avenue, Burton-upon-Trent, Staffordshire DE14 2WF;

'Qualifying CREST Shareholder'

Qualifying Shareholders holding Ordinary Shares in uncertificated form;

'Qualifying Non-CREST Shareholders'

Qualifying Shareholders holding Ordinary Shares in certificated form;

'Qualifying Placee'    

a Placee entitled to participate in the Open Offer by virtue of being a Qualifying Shareholder;

'Qualifying Shareholders'

holders of Existing Ordinary Shares on the register of members of the Company on the Record Date;

'Register'

the register of members of the Company;

'Regulatory Information Service'

a regulatory information service that is approved by the FSA and that is on the list of regulatory information service providers maintained by the FSA;

'Supplementary Prospectus'

any supplementary prospectus published by the Company pursuant to section 87G of FSMA;

'Record Date'

5.00 p.m. on 15 June 2009;

'Rule 144A'

Rule 144A under the US Securities Act;

'SEC'

United States Securities and Exchange Commission, the government agency having primary responsibility for enforcing US federal securities laws and regulating the securities industry/stock market of the United States;

'Shareholder(s)'

the holder(s) of Ordinary Shares from time to time;

'Spirit Debenture'

means the issue by Spirit Issuer Plc of an aggregate principal amount of approximately £1.250 billion fixed and floating rate secured debenture bonds due between 2021 and 2034, the proceeds of which were lent to the relevant borrowers within the Spirit Group under the Spirit Issuer/Borrower Facility Agreement;

'Spirit Group' or 'Spirit'

Spirit Group Holdings Limited together with its subsidiaries and subsidiary undertakings;

'subsidiary'

a subsidiary as that term is defined in Section 736 of the Companies Act 1985;

'subsidiary undertaking'

a subsidiary undertaking as that term is defined in section 258 of the Companies Act 1985;

'UK Listing Authority'

the Financial Services Authority acting in its capacity as the competent authority for the purposes of FSMA;

'uncertificated' or 'in uncertificated form'

a share or other security recorded on the relevant register of the share or security concerned as being held in uncertificated form in CREST and title to which, by virtue of the CREST Regulations, may be transferred by means of CREST;

'Underwriters'

Goldman Sachs International and Merrill Lynch International;

'Underwriting Agreement'

the conditional underwriting agreement dated 15 June 2009 between the Company and the Underwriters relating to the Firm Placing and the Placing and Open Offer;

'United Kingdom' or 'UK'

the United Kingdom of Great Britain and Northern Ireland;

'United States' or 'US'

the United States of America, its territories and possessions, any state of the United States and the District of Columbia;

'US Securities Act'

the United States Securities Act of 1933, as amended; and

'US Shareholder'

a Shareholder (i) whose address appears on the register of members of the Company as being in the United States, or (ii) any other Shareholder to the extent such Shareholder holds Existing Ordinary Shares on behalf of a person located within the United States.

All references to time in this document are references to the time in LondonUnited Kingdom





This information is provided by RNS
The company news service from the London Stock Exchange
 
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