Inside Track by Peter Martin
It’s cigars all round at Greene King. Not only has the Suffolk-based regional brewer pulled off its biggest pub deal, it has also managed to win enthusiastic City approval. A jump in the share price after the announcement of the hefty £654m acquisition of Laurel’s community pub estate was to be expected, but the positive ‘buy’ recommendations and future earnings predictions from cynical old analysts will have given Tim Bridge, Greene King’s chief executive, extra satisfaction. Greene King now finds itself up with Enterprise and Punch as one of the leading industry consolidators. No longer a “sleepy” regional, it is in the big league now. The purchase pushes its total estate up by 25% to over 2,000 sites. More significantly, its managed house business will grow by around 50%, even allowing for the announced transfer to tenancy or sell off of a net 200 pubs. Greene King will grow from just under 550 managed pubs to a little short of 800, making it the UK’s third biggest managed pub operator by number of sites – still a way short of Spirit and Mitchells & Butlers, but ahead of Wetherspoon and Whitbread’s pub restaurant division. In terms of sales it will be the fifth biggest managed player, behind JDW and Whitbread’s Beefeaters and Brewers Fayres, but ahead of Luminar, the country’s leading late night operator. The big challenge now, as in any takeover, will be integration, and much of that responsibility will fall on the shoulders of GK’s still relatively new managed house boss Mark Angela. As Morrisons, the northern supermarket chain, has found with Safeway, it is not always easy. In the pub trade, there are numerous stories about the clash of cultures when Spirit took on S&N Retail at the beginning of this year. Whatever the truth there, Spirit had least had the benefit of being privately owned and being able to sort things out behind closed doors. As a publicly quoted group, GK will not have that luxury. However, Greene King is no stranger to buying and assimilating businesses and in the pub market has a record second to none in successful integration. Chief executive Tim Bridge has also shown himself adept at learning retail lessons from those he has acquired. GK’s current acquisition campaign started back in 1998 with the £198m purchase of the Magic Pub Co from Michael Cannon. Since then Bridge and his team have done another eight deals, including paying £253m for Morland in 1999, £103m for Old English in 2001 and £67m for Morrells in 2002, not to mention snapping up Beards, Marston’s Hampshire pubs and Dalgety. The Laurel deal may be the biggest to date, but both the Magic and Morland acquisitions were in their time just as significant in the reshaping the business. Magic not only started the strategy that has now delivered the Laurel acquisition, but it brought in the retail expertise that GK then needed, including the Hungry Horse brand. Tim Bridge has continued to look beyond his own backyard for new thinking for his retail and brands business. Mark Angela is a good example, joining from Colgate Palmolive. His predecessor Neil Gillis came from Heinz and the beer division boss Rooney Anand was recruited from Sara Lee. Winning over people is the key to any smooth integration, and the GK management is already talking up the quality of the Laurel team it is inheriting and their business. Tim Bridge’s own understated style will also help to win over not just Laurel newcomers but investors too. GK has promised the City modest upsides from the deal, working on the basis that it is always better to under promise and over deliver, than vice versa. GK usually outperforms, and the City loves it. It’s a style that obviously works internally too. According to one analyst, the Laurel estate only saw annual EBIT increases of 3% since being bought from Whitbread. GK has managed much more, so it will be confident that it can quickly crank up sales and efficiency, particularly with food. Laurel’s average food take is around 14% to 18% of total sales, compared to 33% for GK’s managed pubs. The deal will have given the whole pub sector a fillip. The positive sentiment will have boosted the confidence of Spirit, the sector’s biggest managed pub player, that it can get its anticipated IPO away sooner rather than later. It will also have done no harm to the exit expectations of any number of private equity backed businesses – particularly those off the high street and with a strong freehold element to their estates. Wolverhampton & Dudley, GK’s big regional rival, will certainly not want to be overshadowed for long and, despite its recent acquisition of Wizard, intimated this week that it will continue to be on the look out for purchase opportunities. Whether they like it or not the likes of Barracuda, Noble House’s remaining core food pubs and possibly the odd smaller regional will be attracting attention. Greene King will take some time to digest Laurel, but it is hard to imagine this is the end of its ambitions. GK has the confidence and track record to go on and on. Mitchells & Butlers might be dreaming of a return to the FTSE 100, but at this rate, Greene King might just beat it.