Small beer no longer

THE STORY is almost too good to be true. Six years ago Warrington- based Greenall Whitley was a sleepy, family-run regional brewer best known outside the investment world for sponsoring the Grand National trial at nearby Haydock Park.

Its future as an independent company looked decidedly uncertain as sweeping structural changes began to alter the face of the brewing industry forever. Its sluggish, backwater feel was reinforced by an archaic, two-tier share structure of restricted voting rights that kept control in the hands of the family trust.

But a timely exit from brewing, a big rights issue and two audacious acquisitions, of rivals Devenish in the west country and Boddingtons in Manchester, transformed the renamed and revamped Greenalls Group into Britain's biggest independent pub retailer.

It now takes in 2,300 pubs and restaurants, the Cellar 5 off-licence chain and De Vere luxury hotel. In the last four years pre-tax profits have more than doubled to over pounds 100m. Brokers are looking for up to pounds 150m this year.

The share price has appreciated along similar lines, helped in part by the decision to buy out the family's favourable voting rights and make the shares more widely available.

Last Wednesday, Greenalls' remarkable renaissance reached fruition when it replaced Forte and entered the FT-SE index of 100 leading blue-chip shares with a pounds 1.7bn price tag.

Admittedly, it was an inauspicious start to life among the big hitters - the shares fell 121/2p to 596p as some investors took profits. But that was a mere hiccup compared with Greenalls' spectacular rise from the shadows of its once larger pub rivals.

For Greenalls to supplant Forte among the stock market's elite is not without irony. During its successful bid, Granada made great play of family-dominated Forte's penchant for acquiring trophy hotels without delivering adequate returns to long-suffering shareholders.

Greenalls itself is stuffed with prestige assets, including the Grand Hotel in Brighton - bought just weeks before the IRA bombed it in 1984 - and the Belfry golf course in Sutton Coldfield.

But unlike Forte, Greenalls' track record under executive chairman Andrew Thomas has been second to none.

Greenalls' success is based on the inspired decision to quit brewing and concentrate on pubs, branded restaurants and hotels following the Government's 1989 Beer Orders, which shook up the ties between brewing and pub ownership.

Beer drinking, of the pints of ale variety, is in long-term decline, and brewing is saddled with chronic overcapacity. Greenalls has tried to shed the cloth cap image of the pub by selling higher-margin food and attracting more families to its Jungle Bunnies chain.

Taking out its two nearest rivals also helped. Both Devenish, snatched from under Boddingtons' nose for pounds 214m in 1993, and Boddingtons itself, bought for pounds 527m last year, had come to the same conclusions about brewing and the opportunities offered by pub retailing.

The rationale for the Devenish and Boddingtons deals was sound enough: further consolidation within the pubs industry means the most successful companies will be those large enough to negotiate favourable supply terms with the big brewers. Greenalls is in a much better position to buy beer more cheaply from the likes of Carlsberg/Tetley and Whitbread.

However, Greenalls' purchasing power only accounts for 1.5 million barrels, or four per cent of UK production, and the pendulum may swing away from it if further consolidation among brewers lifts their power.

The question now for investors is do the shares have further to run? They currently command a market rating, which seems about right given that most of Greenalls' pubs are tenanted, though the amount of beer sold there is, in the words of broker Panmure Gordon, "significantly higher than any of the new generation of pubcos" that enjoy premium stock-market ratings.

Of greater concern is the balance sheet. Greenalls paid a full price for Boddingtons, stumping up a chunky 21.5 times 1994 earnings and pushing the level of net debt to 75 per cent of shareholders' funds. That, in turn, could constrain Greenalls' wish to maintain a progressive dividend policy while keeping cash flow neutral.

Greenalls, therefore, will probably raise cash through disposals. The likely candidate is the up-market Country House chain of nursing homes. It was the highest margin business within the Boddingtons' empire, but sits uneasily in Greenalls' portfolio.

Greenalls has an excellent track record in making its acquisitions work and there is no reason to suppose Boddingtons will not be successfully integrated. Cost savings of pounds 18m are promised in the first year and the deal should be earnings neutral.

But the need to raise cash and the continuing fragile state of consumer confidence means Greenalls has little margin for error. After a strong perfomance in the run up to FT-SE entry, the best course is to take profits like the professionals.

Greenalls Group

Share price 596p

Prospective p/e 15

Prospective gross yield 3.3

1994 1995 1996*

Turnover pounds 720m pounds 766m -

Pre-tax profits pounds 88.2m pounds 100.5m pounds 150.5m

Earnings p/share 30.8p 35p 38.6p

Dividend p/share 13.1p 14.2p 15.5p

* Panmure Gordon forecasts before exceptional items