Lloyds sells Admiral Pubs, crystallising a £500m loss

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Lloyds Banking Group (LSE: LLOY.L - news) has crystallised a £500m loss after selling Admiral Pubs for £200m.

The deal will result in Britain’s sixth-largest pubs group being taken over by American hedge fund Cerberus Capital. Lloyds owned all of Admiral’s £150m of debt and the majority of the equity, which fetched an extra £50m.

Admiral (LSE: ADM.L - news) , which has 1,150 pubs across the UK, has been undergoing a three-year restructuring programme led by the bank’s turnaround division.

The pub group ran into trouble as the financial crisis compounded the downturn the industry was undergoing after the smoking ban was introduced in 2007.

By November 2009 it was unable to cope with the almost £1bn of debt it had accumulated through a 2007 refinancing with HBOS at the height of the credit bubble.

After its merger with HBOS, Lloyds inherited Admiral’s loan and agreed to a debt-for-equity swap that saw the bank make a provision for a £500m paper loss.

Lloyds also became the controlling shareholder by means of a complex structure that allowed the lender to retain just under 50pc of the equity but dominate the decision-making process.

Admiral executive chairman Jonathan Paveley said the deal with Cerberus “recognised Admiral’s future potential” and that the hedge fund’s support would “help Admiral develop the business further and strengthen its reputation among pub licensees as the best-tenanted pub group in the country”.

Originally, Admiral was the brainchild of two property families: father and son Alan and Gary Landesberg, and their business partners, brothers David and Elliot Rosenberg. The quartet hoped to build from scratch a new UK pub group that could compete with the likes of Punch Taverns (Other OTC: PCTVY - news) and Greene King (LSE: GNK.L - news) . They used financing secured from HBOS to buy clutches of assets from Whitbread (LSE: WTB.L - news) , Greene King and Punch, which were upgrading their own portfolios away from traditional “wet led” pubs, which had simply relied on drink sales.

But the company expanded too fast and too many of the pubs purchased were unable to keep up with the changing tastes of consumers, increasingly wanting food as well as drink at pubs.

The founders stepped aside after the 2007 refinancing and Mr Paveley, a former executive at Punch, was brought in to revive the company’s fortunes.

Since then, insiders say the business has performed well, selling off 800 pubs in a series of deals and paying back £200m of debt to Lloyds.

In the year to June 2012 Admiral is thought to have generated earnings before interest, tax, depreciation and amortisation of £20m to £30m.

In the first nine months of last year Lloyds sold £31bn of non-core assets. Lloyds sees the Admiral sale as a success because the bank has not been forced to write off more debt than originally estimated and because the disposal has improved its capital position.

Between 2010 and 2011 Lloyds wrote off £22.9bn of assets.