First signs of movement in the sluggish pub sector

Derek Pain: No Pain, No Gain
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The Independent Online

Takeovers have a pleasant habit of waking slumbering sections of the stock market. Last week two of the unfashionable companies I have discussed had bid approaches, with the predictable impact on their shares.

Takeovers have a pleasant habit of waking slumbering sections of the stock market. Last week two of the unfashionable companies I have discussed had bid approaches, with the predictable impact on their shares.

Ring, a lighting distributor in the depressed distribution market, charged to 65p before settling at 44p, up 11p. And the Slug & Lettuce pubs chain foamed 36p to 165p in the sluggish breweries and pubs sector.

In both instances talks are at the preliminary stage. The signalled possibility of corporate action could, besides bringing a new awareness to the shares, have a beneficial impact on two down areas of the stock market.

It is far too early to suggest the talks will signal the disappearance of the thick cloud of despondency hanging over the distribution and pub sectors. But they could be the first tentative indication that a long period of underperformance is ending.

A few years ago, corporate activity woke up the stock market undercard of small industrial companies. They were deep in the doldrums, unloved by institutional investors and relying on occasional, half- hearted support from a then much smaller army of private investors. And many small-cap companies wondered whether they had a stock market future.

The bleak wilderness was transformed by a steady flow of cash takeover bids, mainly from overseas or the management of the beleaguered company. Bidders realised what the stock market had still to appreciate - that seemingly bombed-out shares were actually grotesquely undervalued. I have no idea whether Ring and Slug & Lettuce will attract cash offers. It is unlikely in the case of the pubs chain which many regard as the Cinderella of the themed managed house operators.

One possibility is that Po Na Na, one of the most successful constituents of the fringe Ofex share market, will use Slug & Lettuce, formerly Grosvenor Inns, as the vehicle for a main market listing. The Ofex company, which runs a chain of themed North African late-night bars and a few night clubs, has been talking about moving up market for more than a year.

It has had a close relationship with Slug & Lettuce, a brand, strong in London and the south-east and less successful elsewhere, but high-profile enough to attract other concept-conscious pub groups. Regent Inns is thought to be seeking a brand to go alongside its successful Walkabout pubs, and Bass and Whitbread, the most retail aware major brewers, could be tempted.

Slug & Lettuce's profits display has left much to be desired, leaving any buyer with considerable potential to improve the chain's performance.

Consolidation in the drinks and leisure industry is never far away and another deal could start it bubbling again. Already Slug & Lettuce's statement that it had received "an approach" has prompted other possible bidders to emerge.

Ring, where entrepreneur Nat Puri has nearly 30 per cent, recently produced encouraging interim results. But any expansion plans have been hindered by its shares standing below their 50p par value. It has said any bid will be below 55.5p.

Ring was tipped in September at 32p and Slug & Lettuce mentioned in May at 160.5p.

Two companies in the no pain, no gain portfolio have been in action. Gowrings, the Burger King to garage group, produced on-target year's profits of nearly £2m, prompting Paul Hickman at stockbroker Peel Hunt to forecast £2.12m for the year, with £2.32m next year. The chief executive, Derek Coulson, is intent on expanding the restaurant side and its Burger King chain should grow from 32 to 40 this year.

The car division appears to have survived the turmoil over industry pricing better than most but it is wise to adopt a cautious stance on what was the powerhouse of the business.

City of London, the investment and public relations group, has taken advantage of its high-flying share price, raising £2.5m, placing shares at 635p largely with institutions.

The group intends to use the cash for internet expansion and developing its two existing internet associates, ECeurope, a business-to-business operation, and rchive-it, developing software for archiving and the management of e-mail and other electronic data. Gowrings shares, after touching 151.5p, are 115p against a 103p April tip price; City of London is 350p against a 937.5p high. The shares were 117.5p when recommended in August.

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