Derek Pain: Fuller indicative offer rejected as predators round on CapitalPubs

No Pain, No Gain
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Fuller indicative offer rejected as predators round on Capital Pubs

At one time, the no pain, no gain portfolio reaped rich rewards from corporate activity. For some years before the banking crisis erupted, there seemed to be an insatiable desire to launch takeover offers and indulge in various forms of financial manoeuvring. Such exercises usually involved the accumulation of debt.

These activities were dealt a savage blow by the banking disaster. True, a few bids have appeared since those halcyon days but easy takeover pickings, despite indications that the old merry-go-round might be set to return, have yet to materialise.

The last portfolio constituent to fall to a predator was brewer Scottish & Newcastle, which three years ago succumbed to a combined assault from Carlsberg of Denmark and Heineken of Holland. I was, therefore, delighted when the long drought ended with another beer episode as Fuller, Smith & Turner, brewers of London Pride, rolled out what appears to be a bid for The Capital Pub Co, a pub chain recruited to the portfolio in January.

As I write, Fuller has not actually produced a bid. Its indicative offer of 200p a share has been rejected by the Capital board, because it believes it undervalues the company.

Whether Fuller goes hostile or not remains to be seen. I sympathise with the pub group. It has some splendid outlets and enjoys something of a rarity value as it is one of the few remaining quoted independent chains.

In recent months, other similar but unquoted groups have fallen, with Young & Co absorbing the 26-strong Geronimo chain for £60m and Greene King splashing out £53.3m for the 14 London outlets of Realpubs and £55.8m for the 12 sites of Cloverleaf.

Admittedly, these three captures were largely food-led pubs, whereas Capital's 34-strong estate has a more pronounced drink affiliation. Still, on the surface, Fuller's offer, capitalising Capital at £53.9m, seems to be rather tight fisted.

There is little doubt the price of quality London pubs is increasing.

The industry may be in the doldrums nationally but many top sites in and around London are, in relative terms, thriving. And Capital's enviable establishments are in London or nearby.

The number of successful pubs still available to any ambitious brewer or pub group is dwindling dramatically. Although Fuller should – and I suspect would – be prepared to pay more, there is every chance Capital will attract attention from other drinks players.

One predatory candidate must be Marston's, another portfolio constituent. The Brakspear and Pedigree brewer is rather thin on the ground in Capital territory and, although heavily borrowed, could see the logic of swallowing its pubs. However, it could feel it has its hands full developing a spread of newly-built, food-led pubs. It has already undertaken around 40 and, from next year, hopes to create 25 such outlets every 12 months. Still, if Marston's should be stirred into action, it would be the first time one constitute has bid for another.

Other drink groups, including under-siege pub chain Greene King, could also be tempted, having arrived on the stock market in 2007. A sister venture, Convivial London Pubs, with eight outlets, is traded on the JP Jenkins-matched bargains market.

So far this year, Capital has acquired two London pubs and hopes to build its chain to around 50. The attraction of London is further underlined by Fuller's activities – it recently announced the acquisition of three pubs in the London area, including a house at Twickenham that I have been known to frequent and, I suspect, would have been an ideal addition to the Capital network.

This week Capital underlined its opposition to the Fuller assault. It reported adjusted profits up 48, per cent and a pre-tax figure of £3.5m against a £1.5m loss. The first dividend since 2008 will be 2.25p a share against earlier indications of 2.1p. And it unambiguously intensified its argument against the value Fuller's offer placed on the company.

The portfolio descended on Capital shares at 120p. After the profits announcement and spirited defence, the price hit the Fuller valuation of 200p. My guess is the brewer will have to increase its bid by a considerable amount if it wants to win the day.

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