It was last August that I wrote of Andrew Teare’s arrival at leisure conglomerate Rank Organisation. Teare had brought a fresh, consultative style of management to Rank; he was embarking on a much-needed programme of disposals and his strategic aim to abandon Rank’s field of historic earnings (Rank Xerox) in favour of the altogether stickier pastures of catering (Hard Rock) showed guts.
I concluded that the City jury was out, but that it wouldn’t deliberate long – the City was sick of Rank and would need to see some speedy action.
Come April, Teare will have been at the helm of Rank for a year. This is no time at all in industrial terms, but an eternity in a City where the short term is where fund managers earn their livings.
Late last week, Rank unveiled a fall in pre-tax profits for the year to December 31 from 515m to 65m on a 9 per cent rise in turnover to 2.1bn. Far from this being a signal for Teare to be taken out and shot, Rank’s shares promptly became the best-performing counters in the FT-SE 100, rising 27p on the day to close at 442p.
The reason for this institutional vote of confidence was partly because underlying pre-tax profits had actually risen by six per cent – the overall fall being mainly due to exceptional losses of 232m, including 148m of property write-downs. But the main reason was that Teare had raised expectations of a share buy-back and set onerous performance targets for the group’s main businesses.
I said last August that time was of the essence for Teare but – for the time being, at any rate – he appears to be getting away with it. His detractors would say that there are a number of reasons why he should not. For a start, the intention to sell Rank’s 930m stake in Rank Xerox is not a new one; merely to state that negotiations are to start with its management is to raise the question of what these people do all day if not talk to each other about such vital matters.
Secondly, there is the small matter of deciding whether Teare’s new performance targets are realistic. It is one thing to talk tough, quite another to act tough.
Teare has declared that he expects to see a 15 per cent return on capital for Rank’s businesses. It is hard to see the expensively-acquired Tom Cobleigh pub chain achieving that, as Teare promises, by the second year of operation.
Two of Rank’s divisions, film services and holidays, which contribute half group operating profits, may even see returns decline (a buyer can be expected to emerge for the film services division before the year is old). Even Hard Rock, cast as a growth star, managed only a 7.5 per cent return on capital last year. There is talk of a brand awareness campaign for Hard Rock, but I would imagine that something rather more substantial than being aware of it is needed in order to reach that 15 per cent capital-return target.
His detractors could go on (and do), but enough said for the time being. The fact is that Rank’s shares have under-performed the market since last summer by some 25 per cent, and it has only taken talk about giving some cash back to shareholders and a bold setting of performance targets to send the share to the top of the FT-SE performance charts.
There must be more to Rank than meets the untutored eye. And I suspect that part of the answer is to be found in the US. Rank has recently had a disappointing time over there and Teare promises that there will be a review of US activities in holidays. A seven per cent rise last year in UK holiday profits to 60m was more than wiped out by a 45 per cent fall in US activity, from 11m to 6m.
Rank may quit the US holiday market, but its experience there may have illuminated opportunities in a market which, to date, is under-developed in Britain, but which is at the core of Rank’s trading activity. I speak of gaming.
Casinos are central to American leisure culture. To date, they have only touched the periphery of the leisure market in the UK. That could change if Rank has the bottle and the will to be the agent of that change.
The US casino market is already rife with takeover and consolidation. But in Britain, the market is nascent. Rank is increasing capital investment and looking for acquisitions – last year it spent some 400m on acquisitions, so this is no empty rhetoric.
My guess is that the City has got wind of something earnings-enhancing in the casino market – there is little that can be conceived that is as cashflow-generative as a casino – and that this is pushing Rank’s share price, as well as those promises on return on capital.
Perhaps Rank could import something American; perhaps it has its eye on revitalising something British. But I would risk a modest bet that this is why Teare is being indulged by cold-eyed City gamblers.