Inside Track by Mark Stretton
Another week, another regional brewer and pub operator. The trend of consolidation among the historic and unique regional companies that form a significant part of the pub and beer industry shows no sign of abating. Hardys & Hansons, which is to be sold to Greene King for £271m, joins a growing list of such companies to be bought by bigger rivals. Others that have gone in recent times include Burtonwood, George Gale, Jennings, and Ridley's. It is hard to imagine the deals for such companies drying up. At the current full prices, it's becoming harder to say no to the cash. Many regional brewers have a disparate shareholder base, the result of holdings passed down through many generations. It means that many individuals are sat on substantial personal wealth that is tied up in a company into which they have no direct control or input. It seems only natural that many should want to realise such holdings. Apart from anything else it makes sense for such individuals to spread their wealth across a range of investments rather than having their entire pension fund riding on just one company. The issue arose at McMullen a few years ago. Some substantial pieces of property were sold to satisfy those shareholders that required an exit - and the company retained its independence. Looking at Greene King's track record on buying and assimilating businesses, there is no reason to suspect the company will not make the Hardys & Hansons transaction work, but a very full price has been paid. On an historic group ebitda basis, Greene King will pay more than 15 times. To my knowledge it is the highest profit multiple paid yet. In order to effectively break even on the deal, Greene King has made a number of assumptions on synergies. It has to see profit numbers coming through strongly in Hardys' pubs following a busy period of investment, and realise the savings from closing a brewery and a head office. That said, Hardys is clearly an attractive business. In the last six years about £80m has been spent in its pubs business. Virtually every managed house has been repositioned in that time. Food sales in this 83-strong division push 40% and profit margins are impressive. In acquisition mode Greene King places great importance in using the language of “mergers” rather than “takeovers”. It always speaks of combining “the best of both worlds” but with its latest deal, there may well be the opportunity for learning to pass through from Nottingham to Bury St Edmunds. Greene King is clearly one of the most active groups in the consolidation of regional companies, along with Wolverhampton & Dudley Breweries. Sources suggest to me that Hardys & Hansons, through its advisers Hawkpoint, held a very quick and quiet auction once it had received a number of unsolicited approaches. Wolves did bid, but just couldn't quite match the eventual price. There is a perception that this deal pits Wolves against Greene King like never before but in reality, Hardy's geography means that it competes with Spirit, M&B and Whitbread just as much. The one area where the two integrated brewers will go head-to-head is in the Mansfield region. A merger of Greene King and Wolves, although always quickly dismissed by the companies, is a favoured hobby-horse of City bankers, given its inherent logic. The issue is more about the need to do it. Once the growth avenues to both companies dry up, the subject becomes more pertinent. But when there is a need, it will then be an issue of personality - who gets what job, the structure and so on. At the moment that would be a deal breaker but one day, Greene & Dudley Breweries may just happen. That will not be any time soon. There are still plenty of regional companies to be mopped up - and some family shareholders will be unable to resist the cash.