The first doubters have queried the financial logic behind Enterprise Inns' deal to buy 4,200 pubs from Nomura, with the financial ratings service Moody's cutting the pubco's debt rating to negative from stable.

The deal gives Enterprise, which already owns around 3,500 pubs,

an initial stake of just under 17% in the £2bn Unique Pub Co/Voyager Pub Group set-up, with the right to buy the rest in 2004 from the other partners, Cinven, Morgan Stanley's Princes Gate Investors and Legal & General Ventures, for around £720m plus £1.5bn in debt.

Moody's said it had changed its outlook on Enterprise's debt rating to reflect the heightened risk profile associated with both the initial investment of £75m

in a 16.8% stake in a joint venture acquisition vehicle, as well as the uncertainty surrounding the size and composition of the funding required by Enterprise to buy out its partners in 2004.

Magnus Grimond of the City analysts Hemscott said there were queries about Enterprise's ability to finance the purchase, given that in September the company's gearing was already 175%. He said: "By most standards, interest charges covered by operating profits of just 2.5 times is a slim margin of error."

Enterprise's chief executive, Ted Tuppen, "can point to exceptionally strong cash flow and borrowings well supported by freehold property to back his argument that Enterprise can bear a higher level of debt than most companies," Grimond said. "But on the face of it, even with a chunky rights issue raising something north of £500m, Enterprise might still have to live with gearing of over 100%."

If, as expected, interest rates rise to somewhere around 7%, Grimond said, this "could put an unbearable strain on Enterprise if it had to bear the full burden." The comfort for investors is that a third of its existing debt is already held at fixed rates of interest, shielding the company from higher money costs, while some £1bn of debt in Unique/Voyager has been securitised and Enterprise says the expectation is that the 970-strong Voyager chain will be securitised over the next 12 months.

The second problem, Grimond said, "is whether Tuppen and his team have the wherewithal operationally to handle such a major expansion," which will mean a more than doubling of the estate. "Only time will tell," Grimond said, though he conceded that "after successfully integrating something like a deal a year for the past several years, they certainly have a proven track record to point to."

Elsewhere in the City, analysts were enthusiastic about the deal, however. Simon Larkin, an analyst at ABN Amro, said the multiple on Enterprise's initial 16.8% stake purchase "looks fair in the light of other recent deals", with an ebitda to enterprise multiple

of 9.1 times, in the middle of other recent pub deals, such as Whitbread's sale of its pubs to Morgan Grenfell Private Equity last year at 8.8 times or Nomura's sale earlier this year of Inn Partnership to Pubmaster at around 9.4 times.

Larkin said Enterprise's stake in the Unique/Voyager vehicle, known as Newco, will push earnings 7% higher than they would otherwise have been even in the current year to September and as much as 15% higher in 2002-2003. His underlying pre-tax profit prediction has gone from £91m to £97m for this year and from £104m to £119m next.

However, he suggested Enterprise will require a fairly hefty four for five rights issue to underwrite the acquisition of the rest of Newco and still maintain interest cover in the 2.4 to 2.5 region..

Three other City finance houses upgraded Enterprise in the light of the deal, which will mean Enterprise Inns will own almost one UK pub in eight in 2004. Morgan Stanley, which owns one of the partners in the deal, said the acquisition of the Nomura portfolio will enhance earnings per share at Enterprise by a "conservative" 27%. This would far outweigh concerns over integration risks and future stock overhang, the broker, said, raising its price target to 850p. It lifted its rating to "overweight" from "equal-weight".

Merrill Lynch upgraded Enterprise to "strong buy" from "buy". Deutsche Bank also upgraded the company to "strong buy" from "buy" with a price target of 800p.

Enterprise said Newco "will continue to be managed by its existing management team on a stand-alone basis." Graham Turner, the former finance director at Unique and, since December 2001, its acting chief executive, will be appointed managing director.

Enterprise's chief executive, Ted Tuppen, said the structure of the deal, which allows Enterprise to take full control of the Newco pubs from January 2004, gives it time to develop an integration plan. He said the purchase was likely to be funded by another rights issue.

Tuppen said: "We've had three rights issues since the group floated in 1995 and each one has been well supported and made money for our shareholders. There is a strong indication that another rights would be well received by our investors."

Enterprise Inns' shares ended the week up almost 130p, or 20%, at 789p.