No one is watching with keener interest the bidding war between Punch Taverns and Whitbread for Allied Domecq’s 3,600 pubs than Andy Walder, its marketing director. The outcome may determine whether he will have a job in a few weeks’ time.
Allied Domecq’s board has recommended to shareholders that they accept Whitbread’s &£2.85bn cash and share offer for Allied Domecq’s pubs, a 25 per cent stake in Britannia Soft Drinks, and half-share in off-licence group First Quench.
If Allied shareholders accept this recommendation at an EGM on July 23, Whitbread may hand marketing responsibility to its own man, Mike Tye. Walder could still be in with a shout if Whitbread succeeds, as there will be other marketing jobs within the new structure.
Punch’s bid, led by dogged chief executive Hugh Osmond, is valued at &£2.93bn with backing, among others, from Bass. Punch says it will pass up to 650 of the pubs to Bass, leaving it with 1,300 tenanted pubs and 1,500 managed outlets. But the company has little experience of handling branded pubs, and it refuses to comment on its plans for the managed estate.
However, there is still a question mark over how either company will squeeze greater profitability out of Allied’s array of branded pubs. There will of course be economies of scale. But beyond that, analysts wonder about the logic of such a deal.
Whitbread, unlike Punch, has been given access to detailed information on the Allied estate as part of its exclusive deal with the company.
The uncertainty resulting from the disclosures is thought to have created some of the adverse fluctuations in Whitbread’s share price after the initial announcement of its intention to buy the Allied estate two months ago. Following Punch’s rival bid, Whitbread’s price eased 33p to &£10.38 per share.
Whitbread announced two weeks ago its proposed retail structure, bringing the ADI brands into new management divisions. However, it has steadfastly refused to comment on further plans.
One analyst says: “Whitbread has to be more explicit about what it plans to do. Its initial bid suggests it sees no value in the Allied Domecq brands – if that’s so, why is the bid worthwhile?”
The new Whitbread would comprise seven divisions, three of which would be dedicated to pubs. Family restaurants would be headed by managing director of Whitbread Pub Partnerships Stewart Miller and managed pubs by managing director of Whitbread Inns Bill Shannon. Leased pubs would be led by managing director of Allied Domecq’s managed pub business John McKeown.
Whitbread’s Beefeater and Brewers Fayre chains, which have 637 outlets between them, will be put into the new family restaurants division with Allied’s Big Steak/ Wacky Warehouse family and children concept.
Allied’s Scruffy Murphy’s Irish pub chain and Festival Inns, the large town centre ale pubs, will join Mr Q’s, a local pub concept seen by some as the jewel in the Allied crown, to become part of the managed pubs division. Firkin pubs, of which there are now more than 180, will join Whitbread’s Hogshead real ale in the managed pubs division.
There is no news as yet on proposed marketing positions for the divisions, though if it came to a head-on collision between marketers of the two companies, Whitbread’s staff would clearly have the upper hand.
Walder argues that there are few clashes between the two companies’ pub concepts.
He says: “The mix of the two estates is very good. For example, Whitbread is strong in the Home Counties and not so strong in London, whereas Allied Domecq is the opposite.”
Big Steak and Whitbread’s Brewers Fayre family pub-restaurant concepts rarely clash, he says, and appeal to different customers. He says Hogshead, which many have compared directly to Firkin, appeals to an older and more mature customer than the student-biased Firkin chain.
He adds there will be talks to thrash out possible strategies for the brands in the future.
“We haven’t yet sat down with them and said, ‘This is where we see Mr Q’s’ and ‘This is where we see Firkin’, but that will happen – it must,” he says.
A source close to Allied says: “It seems likely there will be some reshuffling between brands, swapping around some concept pubs depending on location, customer base, and size of its expanded number of sites. But I expect them to pretty much leave things as they are.”
Others are more sceptical of the number of clashes and of Whitbread’s ability to realise the potential of its enlarged portfolio.
Analysts question the company’s ability to translate market leadership into high returns for shareholders.
One analyst says: “Whitbread’s estate is under-performing. Like-for-like sales were down four per cent and its performance as a whole is down three per cent.
“It puts vast franchise in its ability to identify growth markets, but it is consistently failing to deliver on them.”
A note from Credit Suisse First Boston, which is advising Punch over the deal, says: “We doubt that Whitbread has the retail skills it proclaims. Pizza Hut has a virtual monopoly position in the mid-spend family segment, but the chain has yet to deliver a positive spread on return on invested capital.”
Whitbread denies this. Advertisements in national press have sought to vindicate the company in the face of a vigorous press campaign from Punch. Whitbread cites Pizza Hut and David Lloyd Leisure health clubs as examples of its retail nous.
However, Whitbread’s sales, which, like-for-like, are below those of 1998, are dominated by turnover achieved in managed pubs. Last year, 57 per cent of its profits came from the managed estate.
In the UK, control of the biggest number of outlets is the key to growth in this mature sector. Some argue that pub brands have little, if any, value.
David Pope, drinks analyst at Wise Speke, says: “There has been zero growth in brewing in the past ten years – they are all trying to get out. If you don’t own pubs or don’t control the distribution – you are going to be nowhere.
“I would question whether there is truly any equity in a pub brand anyway.”
Bass needs to prevent its rival from gaining too strong a grip on the distribution chain – still the biggest growth element in the drinks industry. But its own managed brands, though successful, are limited. The acquisition of a solid circuit pub concept such as Firkin would be a useful addition.
Whitbread is committed to leaving its brewing past behind in favour of its retail interests. For this reason, it cannot fail to win the battle for Allied’s pubs. In the unlikely event that Allied’s shareholders go with Punch, Whitbread will face a double blow – its plans to exit brewing will be in tatters, and it will face competition from a more powerful Bass.