Pubs give Nomura a thirst for retailing

Nomura’s new position as the UK’s largest pub owner could hit Scottish & Newcastle’s profits, but this is just the beginning for a Japanese bank seeking exotic solutions to problems back home.

Japanese investment bank Nomura is buying large chunks of Britain. Just 12 months after Marketing Week reported on the influx of Japanese packaged goods manufacturers to the UK (MW August 30 1996), it is a Japanese company in the more traditional banking field which is starting to make waves.

It has outbid UK rivals on a range of deals, including the 700m buy-out of the 1,700-strong William Hill betting chain two weeks ago, where it paid considerably more than its rivals were prepared to offer.

Rival Japanese investment banker Daiwa Europe paid 16.4m on Monday for 147 pubs from Wolverhampton & Dudley Breweries – less than half that paid by Nomura. But the Daiwa deal is a further example of the increasing influence of Japanese banks. The betting chain is the latest addition to a collection of pubs, houses and rail stock Nomura has been gathering over the past three years.

Nomura has funded these deals with “cheap” Japanese money – cheap to borrow, that is. In Japan, interest rates are about one or two per cent, compared with seven per cent base rates in the UK. Nomura has access to this “cheap” money in a way UK investors do not.

Nomura’s UK ambitions should be considered in the context of developments in its domestic market. The Japanese stock market is about to undergo major deregulation, along the lines of the UK’s Big Bang.

Three of Japan’s biggest brokers – Nomura, Nikko Securities and Daiwa Securities – are expanding their operations in London, which Nikko’s head of international operations, Michel de Carvalho, says is “the only large international centre left in the world”.

Nomura, with $14.3bn (9bn) of assets, has already firmly established itself in London with its Nomura International subsidiary, and hopes to repatriate some of the knowledge of working in a deregulated market to Japan when its Big Bang happens. Nomura International contributed $43m (26m) to Nomura Securities Co’s $1.395bn (861m) profits for the year to March.

But the picture is not universally good for Nomura. Japan’s big four brokerage houses are embroiled in a scandal which emerged in March. Nomura has faced stiff penalties after allegedly paying off “sokaiya” racketeers, who buy shares in companies and also extort money by threatening to expose dubious business practices.

The company’s president, Junichi Ujiie, has warned that Nomura could be destroyed if it is hit by any more financial scandals in Japan. “This is our last chance,” he told a news conference last week.

But in the UK the past three years have seen Nomura involved in a range of acquisitions, particularly in pub retailing, where it has been catapulted into a key position in the market. Its predominant position in pub ownership – established four weeks ago with the 1.2bn purchase of the Inntrepreneur pub chain and 1,400 Spring Inns – gives it enough clout to leave UK brewers reeling when they come to negotiating beer supply deals this winter.

However, it is not only in the pub sector that Nomura is having an impact with its extensive acquisitions. It also spent 1.7bn on buying 57,000 residential homes from the Ministry of Defence 13 months ago. And in November 1995 it backed the buyout of Angel Train, one of Britain’s three rolling stock operators for 672.5m. This deal, as opposed to other Nomura purchases, was thought to be a considerable discount on the company’s real value – a suspicion supported when the Government was criticised by the National Audit Office for letting it go so cheaply.

Nomura uses a complex financial arrangement to fund the deals, called securitisation – it sells bonds to underwrite the debt incurred in buying the businesses, and uses the predicted cash that the businesses will generate as security for the bonds. British venture capitalists cannot compete with Nomura’s access to low-interest funds. As a result all the takeover targets have high cashflows.

Securitisation is high risk. A slight miscalculation could wipe out profit. But Nomura’s deep pockets must send shivers through some sectors of the UK market. If it can snap up large chunks of British business, it can use the immense buying and market power this gives it to influence other sectors.

Nomura is looking at hundreds of possible deals in the UK. What if it bought another gaming giant to sit alongside William Hill, say in the ailing pools or bingo sectors? There is renewed speculation, denied by the company, that First Leisure’s bingo division is for sale. These companies have a high level of cashflow, making them prime targets for securitisation. Nomura could start building unassailable positions in any one of a range of industries, and its “cheap” money gives it an edge over its competitors.

The size, and power, of that edge is about to be tested. Britain’s brewers face renewal of their contracts to supply beer to thousands of pubs. When the pub owners – and Nomura in particular – come to renew the supply contracts over the next six months, they will be looking for significant reductions in the wholesale price they pay for beer.

Over the past three years, Nomura has bought 5,400 pubs and now owns about nine per cent of the UK’s total, making it the country’s largest pub owner. First it bought 1,800 Phoenix Inns pubs from Inntrepreneur in October 1995, though it has sold off over 600. Last month, it bought the rest of Inntrepreneur’s 2,900 pubs, plus another 1,400 Spring Inns. It paid 1.2bn for the latest tranche of pubs – many observers consider this was “over the odds”.

The Inntrepreneur and Spring Inns pubs have been merged into Nomura’s Grand Pub Company, giving it huge buying power, not just in beer, but in other supplies to the pubs such as food and energy.

The new company is planning to reap the benefits of this power when the agreement to supply the Inntrepreneur pubs with beer from Scottish & Newcastle (S&N) ends in March next year. As Mike Foster, chief executive of Inntrepreneur, says: “We will now be negotiating for 4,300 pubs, which will improve our position in negotiations with S&N. Now that the future of Inntrepreneur is more settled, it will be easier.” The Grand Pub Company will also be able throw the 1,200 Phoenix Inns into the mix, giving it serious buying power.

City analysts are anticipating that this new, centralised buying power, financed by cheap Japanese money, could hit S&N and its Scottish Courage brands.

“We are expecting S&N to lose ten per cent of brewing volume in the short term. Eventually, it could lose four per cent of its volume. It is trying desperately to keep it [the contract],” says drinks analyst Philip Hawkins of Merrill Lynch. He estimates loss of the brewing volume could cost S&N 15m, and may force another restructure.

“It is hard to see any wholesale beer price inflation. If Inntrepreneur had been broken up, wholesale beer price inflation would have gone up.” However, he points out that the beer drinker is not benefiting from this low inflation, because pub owners are spending more on renovating their pubs.

Richard Gibb, corporate affairs director at S&N, admits the renegotiation will affect the brewer, but says it is still not clear which of Inntrepreneur’s tenants will end up being tied to the pub owner and which won’t. Those who are not tied can be targeted by S&N’s sales team. He says he is confident that the strength of Scottish Courage’s brand portfolio will keep untied landlords in with them.

“We have been taking this into account since 1991 in the case of Courage, and since 1994 in the case of S&N.” Gibb is evasive over what proportion of S&N volume is at risk. But he points out that the Allied-Domecq supply deal with Carlsberg- Tetley ends in December, and that Greenalls’ deal with Bass for 2,200 pubs ends next year. So S&N will be trying to win volume from Allied Domecq Inns and Greenalls.

Gibb adds: “The contracts are all a function of the Beer Orders. There’s a degree of coincidence about the timings.

“The process of negotiation has been disrupted by Nomura’s buyout, but it goes on. It’s not a deal that means we fall off the end of a cliff when it expires. People won’t immediately change the taps. We will lose volume by attrition, not by overnight transformation.”

Analysts say it is likely that Inntrepreneur will continue to buy S&N brands after the supply contract expires. But it will be able to do so on stronger terms than previously by adding Spring Inns and Phoenix Inns into the negotiations.

In any one year, Nomura looks at up to 100 possible deals, pursues around ten, and may end up making two acquisitions. A spokeswoman for Nomura International, its London headquarters, says the company is looking for businesses which have “the right fundamentals” – strong cashflow and an ability to lend themselves to securit- isation. Nomura is not necessarily looking to build strong positions in markets, as it has in the pub business, she says.

But over the next few years, Nomura will be under scrutiny as it makes new acquisitions. Its ability to build unassailable market leading positions in different sectors could lead it to the brink of monopolistic status. It has bought a huge number of pubs, and is about to reap the benefits of this powerful position to the disadvantage of the brewers. If Nomura extends its power and influence into other sectors it might not be just the brewers who end up crying into their beer.

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