Issues associated 
with growth by acquisition

In all cases, Greene King’s acquisitions have been of underperforming or marginal businesses on the treadmill of increasing production costs and declining volumes and yields. Through their core competences in turning round such acquired assets, they are able to return them to profitability.

In an earlier work Peters and Waterman strongly advocate the creation of an overpowering niche strategy, which is demonstrated here. They found that truly excellent companies should ‘stick to their knitting’.[1] Lynch identifies one disadvantage of growth by acquisition as where the premium paid is too high. A thorough approach to due diligence ensures that this potential trap can be avoided.[2]

Greene King’s mission states

Our aim is to emphasise the achievement of organic growth, supplemented by a prudent acquisition strategy through three horizontally integrated trading divisions. The integrated model provides financial and operational synergies, as well as the opportunities to share intellectual capital across the group. It allows flexibility to transfer pubs between divisions, helping to maximise returns on assets, as well as giving balance and an element of natural hedging of risk.

That Greene King is obviously in the business of acquisition is evidenced here. During the late 90s they embarked on a series of takeovers. They bought the Magic Pub Company in 1996, Beards of Sussex in 1998 and Marston’s southern estate in 1999. In the same year they purchased Morland which had a considerable tenanted and managed pub estate and whose brews included Ruddles Bitter and Ruddles County. They then closed Morland’s Abingdon brewery, transferring production to Bury St Edmunds. In total, these acquisitions provided Greene King with 903 pubs.

Growth continued through acquisitions in the 2000s. In September 2001 they acquired 136 managed pubs with the purchase of Old English Inns (of these, they retained 81 under management, transferred 25 to tenancy and disposed of the remaining 20). In April 2002 they bought the eight properties of Dalgety Taverns and followed in June with the purchase of Morrells of Oxford, acquiring a further 107 outlets.

In July 2004 they purchased 432 pubs from the Laurel Pub Co for £654m. This acquisition boosted their premises to more than 2,100. In June 2005, they acquired the 73 pubs of Essex-based T J Ridley & Sons. Two months later they agreed to acquire the Scottish group Belhaven for £187m, a purchase which added 300 pubs to their estate. Brewing is to continue at Dunbar near Edinburgh. Apart from sheer logistics, it would be politically imprudent to move brewing south of the border.

Following an intensive review and due diligence, in September 2006, they bought Midlands-based (Kimberly) Hardys & Hansons, with 268 pubs for £270m. It was reported that H&H’s high-quality estate would be integrated into Greene King’s managed and tenanted-pub estate division and that they would benefit from the shared experience, expertise and enhanced support of a larger group, while maintaining their individual characters and ability to service their local communities. In a media release ceo Rooney Anand stated that

with regret, it does not make economic sense to continue brewing at Kimberly and sadly this means that the brewery will close at the end of the year. Greene King invests more in cask beer than any other brewer but, to remain viable, returns have to be delivered on this investment. The best way to ensure that Hardy’s and Hanson’s brands continue to flourish in a challenging ale market is to transfer brewing to Bury St Edmunds. The head office functions will also be moved there.

Beer matching will begin shortly and we’ll soon be beginning the painstaking process of brewing trials and taste-profiling. We’ll ensure that customers can continue to drink the same great beer in the future. We have a track record in making a success of the brands we acquire and look forward to offering H&H’s Dark Mild, Cool and Olde Trip to a much wider audience in both the on and off trade. At the time of this deal, our companies make an ideal match historically, culturally and structurally. Like Greene King, Hardys and Hansons built its trade on running great pubs and selling top-quality beer. By joining together h&h can extend beyond their current communities.[3]

This demonstrates the flexibility and sensitivity exercised in both integrating and bringing acquisitions on side.

While this much-expanded portfolio of pubs gives them both critical mass and improved location representation, it also presents the opportunity to review the total estate and churn or sell off those deemed surplus or not to today’s quality standard. As the trade press reported:

Greene King has appointed Pricewaterhouse Coopers to advise on the sale of 150 tenanted pubs. The pubs, most of which are freeholds, are said to be a mix of smaller drink or wet-led operations and sites with property development potential.[4]

A key criterion emerged as the smoking ban approached: after July 2007 only pubs capable of strong food business would be retained. On 21 November 2006, Greene King announced the sale of 155 (five extra) pubs to Admiral Taverns for £56.53m. Anand stated:

Greene King’s drive to improve the quality of our estate has meant that we have long been sellers as well as buyers of pub assets. Today’s deal marks another step in this strategy.

A similar strategy is being employed by Punch Taverns, Britain’s biggest pubco. On 21 March it was announced that ‘Punch calls time on 1,000 pubs ahead of the smoke ban’.[5] Here it was reported that Punch had earmarked for disposal many of their small drink- or wet-led tenancies that would suffer most when smoking was banned in Wales from 2 April 2007 and in England from 1 July. It was also mentioned that

most of Punch’s rivals had already sold or put on the block large tranches of smaller pubs that are less able to mitigate the impact of the ban by serving more food.[6]

In his half-year profits statement December 2006, Anand confirmed that

these recent acquisitions had served to increase operating profits by 17 percent to £101m on revenues of £419m.

Having led the consolidation of regional brewing in the East of England, Greene King is now bidding to increase its geographic footprint. The excursions into the Midlands and Scotland are most certainly a portent for its future growth.

In his seminal work, Competitive Strategy, Michael Porter devoted a whole chapter to the unlocking of the structure of traditionally highly fragmented industries where owner-managers abounded, often in disparate locations. He predicted that, as these industries became more consolidated, there would emerge ‘market leaders with the power to shape events’. Porter projected that

overcoming fragmentation can be a very significant strategic opportunity and that the payoffs can be high.

All of the factors he called ‘accelerants’ in this process are present here:[7]

1. Greene King achieves significant economies of scale through cost dilution, central-cost savings and increased buying power.
2. Their expanded portfolio of pub outlets gives them better representation and/or critical mass, often filling gaps and allowing better opportunity to churn their estate, determining the most appropriate mix in terms of managed to tenanted pubs. They can also sell off units which perform below par, or fail to reach quality standards.
3. For their much-expanded portfolio of beer brands they can achieve more effective and efficient distribution in ‘on’ sales and have much more clout with the major uk retailers for their ‘off’ sales. All this leads to increased yields and profitability.
4. There is an increase in their core competence in brewing as they travel down this experience curve. Bottling and other distribution costs are reduced pro rata.

References

1. T Peters and R Waterman In Search of Excellence (New York, Harper & Row 1982) pp 292–305
2. R Lynch Corporate Strategy 4th ed (Harlow, FT Prentice Hall 2006) pp 466–469
3. Greene King Media Release ‘Integration Plans for Hardys and Hansons announced’ www.greeneking.co.uk 3 October 2006 accessed December 2006 and January 2007
4. ‘Greene King appoints PricewaterhouseCoopers to advise on sale of 150 pubs’ The Morning Advertiser 18 October 2006
5. Dominic Walsh ‘Punch calls time on 1,000 pubs ahead of smoke ban’ The Times 21 March 2007 p 44
6. Michael Porter Competitive Strategy (New York, Free Press 1980) pp 199–214