Stunning results
Greene King’s business model most certainly works. The enviable growth in all prime indicators – turnover, profitability and dividends – continues. The 2006–7 results (released 7 July) allayed any fears about the smoking ban after announcing a 17 percent rise in full-year pre-tax profit to £139.8m. Shares closed up 76p at £10.36 on the announcement as it also posted a 12 percent increase in sales to £917.5m.
The group assured investors it was well positioned for the smoking ban, which came into force in England the previous Sunday and said that its pubs in Scotland, where the ban came into effect in March last year, had given it extensive experience. CEO Rooney Annan said:
sales in our pubs were higher this Sunday than the same day last year. More than 95 percent of the group’s pubs have outside areas, and Greene King has been developing the food side of its business.
The higher-risk throw
Shares were also helped by the news of a Greene King spin-off of up to 872 pubs into a OpCo–PropCo structure – an operating company and a property company – with a joint-venture partner. The remaining 65 percent of its estate is already securitised. Annan commented:
In moving to a OpCo–PropCo we believe that we could benefit from additional skills and disciplines which will further help us to unlock property value from our estate.
Will last week's systematic re-pricing of risk – especially property risk – effectively close off the investment funds that have recently been so eager to pile into these deals? Uncertainty about funding was one factor in sinking Mitchells & Butlers property joint-venture for their estate in July. Do further acquisitions by GK depend on the successful outcome of this arrangement?
Enter Loch Fyne
Here we consider three possible targets and a late entrant – Loch Fyne Seafood Restaurants.
In early August, before the recent turbulence, the financial press was speculating on the suitors for Loch Fyne, and they are now in exclusive negotiations. A common part of their analysis is that ‘pub companies are becoming increasingly interested in snapping up restaurant chains as they focus more on selling food.’ GK is seen as a strong contender for the sea food restaurant group which has 35 restaurants valued around £70m.
Food is seen as a high growth market with some estimating that by 2020 in the UK, 50% of all meal occasions will be catered still far short of the US market where currently 70% plus are catered. The pub companies, in seeking high market share, are following the directional policy as suggested in the BCG Matrix of investing in this high-growth markets.
Other contenders
All analysts seem to agree that Youngs of Wandsworth will be bought soon, the only question is by whom:
- Youngs have a coveted estate of 221 pubs, many of them on prime sites along the Thames (freehold valuation £399m) although, is there a flooding risk?)
- Their food sales are above 30% of turnover
- They have some very attractive cask ales including Young’s Special and Waggle Dance.
Let’s consider Charles Wells of Bedford
- Charles Wells has a desirable estate of more than 200 pubs
- It brews the well-known Bombardier cask ale as well Banana Bread Beer
- There has been much investment in food.
Or how about Shepherd Neame of Faversham Kent ?
- A well-managed estate of 370 pubs
- Unique Kentish ales including Spitfire and Bishops Finger
- Many of their pubs are categorised as food-focused destinations.
Who is it to be? Can the pace of acquisition be maintained in a cooler market? Watch your financial and trade press.
