Wednesday 25 April 2018

Selling eight million drinks each week gives food for thought

Analysis

Wetherspoons' Blackrock pub. Picture credit; Damien Eagers
Wetherspoons' Blackrock pub. Picture credit; Damien Eagers
Mitchells & Butlers' five-year share price

John Lynch

With the recent entry into Ireland of the pub operator JD Wetherspoon, the pub-casual eating business has come more sharply into focus.

It is a business, I think, we have to learn afresh following the catastrophic property bust. Far too many fortunes were lost by assuming that the good times would continue to roll.

But while Wetherspoon is making a charge here, there isn't all that much guidance to be had in Ireland from the UK experience in this very specialist market.

It is a world away, as the company we are analysing today, Mitchells & Butlers (M & B) shows. That being said, there is more than a passing Irish shareholder interest in M & B.

Though an independent brewing firm from the end of the 19th century, M & B became part of the Bass Brewery setup in the 1960s, a strategy that had to be reappraised in 1989 when Britain's 'tied house' ownership structure was changed.

M & B was subsequently re-listed on the stock exchange in 2003 under its old name. It is now a FTSE 250 company, valued at £1.6bn. M & B has been through the wars in the last decade. It was targeted by businessman Robert Tchenguiz who slapped in a bid of £2.7bn.

The bid was dismissed out of hand. Two years later there was an attempt to sell £5bn freehold property to a real estate group owned jointly by M & B and Tchenguiz.

The proposal was abandoned but as a result the company incurred losses of £260m. Punch Taverns spotted that M & B was vulnerable and proposed a merger that was later withdrawn. During this time M & B was also coping with legacy problems following its floatation.

As a result it exited its hotel business when it sold 52 hotels to Travelodge. In 2010 it sold its last remaining non-core business, the ten-pin bowling alleys to its rival AMF. However a year later it faced another takeover bid. This time from a successful UK businessman, Joe Lewis, another deal that did not go through.

Today M & B is a food- led business and a leading UK pub/casual eating operator.

It has 1,700 managed outlets generating sales of close to £2bn and employing 40,000 people. The company has many brands including O'Neill, All Bar One, Toby Carvery, Harvest and 40 Alex bars in Germany.

In any one week its sells a staggering 2.5 million meals and 8 million drinks. The food end of the business contributes over 60pc of group revenue and almost half of the group's revenue comes from London and the South East.

Recently the company confirmed the purchase of 160 pubs from the Orchid Group for £226m. M & B expects to brand one hundred of the acquired outlets within two years.

The deal was not cheap, and there is concern that integration may be at the expense of existing business. However the acquisition should be earnings enhancing and improve on last year's revenue of £1.9bn and net profit at £130m. The recent half year results were in line with expectations.

Interestingly two groups account for almost half of the company's shares and this is where the Irish connection comes in. One is a company called Piedmont, with 27pc of the stock which is said to be in controlled by Joe Lewis.

The second group is Elpida with 22pc and assumed to be the vehicle of the astute Irish investors, JP McManus and John Magnier.

The groups shares trade at 405p and price to earnings ratio of 12, a discount to other pub groups. Since 2008 M & B has not paid a dividend, understandable as its debt stands at £1.7bn.

Overall the company is making progress, having solved its difficult pension problem and is well positioned to benefit from an improvement in an election-fueled economic recovery in the UK, and a fragmented pub-casual eating market.

NOTHING IN THIS SECTION SHOULD BE TAKEN AS A RECOMMENDATION, EITHER EXPLICIT OR IMPLICIT, TO BUY OR SELL ANY OF THE SHARES MENTIONED

Irish Independent

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