Stonegate is best known for owning Slug & Chain pubs Lettuce and Yates Photo: Greg Balfour Evans/Alamy Stock Photo
It's a humid weekday afternoon and The Bay & The establishment on London's Artillery Row is virtually empty, save for a lone pair of businessmen who appear to have snuck out of work early for a drink.
The quiet scene belies the drama unfolding at the sports bar's parent company, Stonegate. The UK's largest pub operator, best known as the owner of Slug & The salad chains and Yates are struggling under the weight of billions of pounds of debt.
Stonegate, which owns more than 4,500 venues including The Bay & Bracket, in accounts released last week, warned of “material uncertainty” about its ability to continue as a going concern if it is unable to refinance more than £2 billion of borrowings.
“Although There is a plan to refinance this debt, since at the date of signing of the financial statements there is a risk of completion of this exercise,” he admitted.
At another pub visited by The Telegraph, Time's young partner Barman shrugged off the company's worries, uninterested in the corporate drama. Bar staff were told not to talk about Stonegate's debt problems.
Not everyone shares this disdainful attitude. Concerns had been growing for some time about Stonegate's debts, which stood at more than £3 billion at the end of the financial year.
Early last year it emerged that Stonegate was trying to sell around 1,000 pubs for £800m to pay off loans, but no buyers were willing to pay the asking price. It refinanced £638m of pubs in December.
Stonegate's problems are partly caused by the wider downturn in the hospitality sector, with people leaving home less after the cost of living crisis, costs rising due to inflation, Gen Z is drinking less alcohol than previous generations and many businesses have Covid loans to pay off.< /p>
But Stonegate's troubles are also symbolic of broader problems facing many private equity-owned businesses.
Companies were flush with cheap money at a time when interest rates were at record lows. Now debts that once seemed manageable are quickly becoming serious problems.
Stonegate was founded in 2010 when private equity firm TDR Capital bought 333 pubs from All Bar One owner Mitchells & Butlers for £373 million. The company grew steadily over the course of a decade, followed by a series of deals buying up pubs from rivals and turning them into its own business.
The vast majority of Stonegate's debt stems from its acquisition of rival pub company Ei Group. in 2019 the company valued Ei at £3bn and Stonegate took on £1.7bn of debt.
The deal increases the number of bars and pubs under Stonegate's control from just under 800 to thousands. But the timing couldn't have been worse: the deal closed in March 2020, just days before the UK went into lockdown.
“There was good strategic value in the deal, but very bad timing,” , says one pub company executive.
Stonegate has had to endure holidays, closures for months during lockdown and a slow and uneven recovery for the hospitality industry once the pandemic passed.
However, the most painful thing has been the rise in interest rates, which have soared from 0.1% in December 2021 to 5.25% today.
This has led to an increase in Stonegate's debt servicing costs. Accounts show the company made an operating profit of £68 million last year on revenue of £1.7 billion, but finance costs of £301 million resulted in the business making a pre-tax loss of £257 million.
It's a similar story with other private equity-funded ventures. Asda, which TDR also co-owns, is also racking up hundreds of millions of pounds in interest payments following its debt-driven takeover in 2021.
MPs have criticized TDR and co-owners Mohsin and Zuber Issa over Asda's £6.8 takeover billion pounds sterling and the viability of private equity investment on the high street more broadly.
Charlotte Nichols, Labor MP and member of Business & The Select Committee on Commerce says buyout magnates should have been prepared for the possibility that interest rates could rise even before the pandemic.
“To take out a mortgage, the loan is stress tested at an interest rate of approximately 10%. You have to be prepared for changes in your financial circumstances,” she says.
TDR co-owners Zuber (left) and Mohsin Issa's takeover of Asda was fueled by debt. Photo: John Super
It's not just high interest rates putting pressure on Stonegate.
Inflation has driven up the cost of everything from electricity to wages and ingredients, putting significant pressure on profits.
“When you're that big and you have thousands and thousands of businesses, what you need is 2%, 3% or 4% growth every year to make good money,” says a senior industry official. “The problem now is that you get so little growth, but your costs cancel it out.”
Demand for nightlife has also plummeted since the pandemic.
“The night market has disappeared “says the pub manager. “Behavior in Covid has shifted away from the night-time sector. People leave home earlier or finish earlier and spend less when they leave the house.”
Pressure is being blamed for the lower cost of living, as are Gen Z customers who are less interested in drinking. than previous generations.
Rekom, the UK's largest nightclub company, closed 17 nightclubs in February after going into administration. Revolution Bars last week announced plans to close 18 bars as part of an emergency rescue plan that will also raise £12.5 million. The company is considering a sale.
Stonegate was less exposed to the woes of the night-time sector due to the diversity of its facilities – there are sports bars, town pubs, country inns and nightlife venues – but it still had an effect.
Stonegate unveils 'dynamic pricing'; to charge customers more money during busy periods “[Stonegate] isn't the big deal people on the outside might think, but it does have some issues they need to sort out,” says the pub's boss.
As the refinancing drags on, the company is making changes as it seeks to protect its future.
It has cut hundreds of jobs at its head offices to cut costs and is understandably considering selling off a large number of pubs to raise cash.Even more controversially, Stonegate has introduced what it calls “dynamic pricing”, whereby customers are charged more for food and drink during busy periods. The company defends the practice by saying the additional revenue is needed to cover “additional staffing or licensing requirements, such as additional door crew.”
David McDowell, chief executive of Stonegate, said in a recent release that the Company has demonstrated “significant increase in profitability” over Christmas. He told The Telegraph this week he has “real confidence in the future”, pointing to upcoming sporting events such as the Euros and T20 World Cup which should boost business.
Mr McDowell added: “We would also like to reassure our valued employees and partners that the facilities are not at risk.”
Back at Bay & Bracket, an Indian Premier League cricket game, plays silently on screens scattered throughout the pub while Al Green's Let's Stay Together plays from the speakers. In a few hours, the bar is likely to be filled with City fans drinking after work, many of whom are unaware of the parent company's problems.
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