No Pain, No Gain: How exciting. We have some takeover action

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The Independent Online

Since the launch of the "No Pain, No Gain" portfolio in 1999, it has been rather short of takeover action. It did score an early and highly profitable success with the little Montana restaurant chain.

Since the launch of the "No Pain, No Gain" portfolio in 1999, it has been rather short of takeover action. It did score an early and highly profitable success with the little Montana restaurant chain. The only other bid constituent, the Safeway supermarket group, attracted such a tight-fisted offer - the direct result of political meddling - that there was little reward.

But the portfolio is now salivating over the possibility of a highly profitable corporate deal. Last week, Merrydown, the cider and soft drink group that is the star performer, admitted it had received a takeover approach. Talks are at an early stage and I realise there is many a slip 'twixt cup and lip. Still, I can hope. If the discussions are fruitful, it will mean the portfolio has really hit the jackpot.

At the time of writing, the shares are about 126p against our 35.5p buying price. Although the investment has been in the black for some time, Merrydown does not represent a quickfire success. Indeed, it was one of my early additions, recruited in the portfolio's first six months.

It was a fairly brave involvement. After all, the company was then on its knees following a disastrous venture into alcopops. A rescue cash call was accompanied by the arrival of new management. The chairman, Andrew Nash, and his chief executive, Nigel Freer, decided to play down Merrydown's cider heritage and devote much of their endeavours towards developing a little-known soft drink brand, Shloer.

It was a high-risk policy. For Messrs Nash and Freer ignored the traditional soft drink market and set their sights on what was then - and still is - the underdeveloped adult segment. But they proved the doubters wrong and achieved spectacular success. By outmanoeuvring and outselling the brands of Merrydown's bigger rivals, they have, I believe, put the company in the takeover arena. Another development that may have increased Merrydown's bid appeal is the decision to outsource cider production, which has remained profitable and provided an essential back-up for soft drink expansion and Shloer made under contract.

So who is the predator? Britvic, the soft drink group due to indulge in a stock market flotation in the New Year, is favourite. But AG Barr, maker of the soft drink Irn Bru, and the US-owned cider-maker Mat-thew Clark are in the frame. And there is vague talk that an industry giant, such as Allied Domecq, could be interested.

While Merrydown awaits takeover developments, another portfolio hit, the Burtonwood pubs chain, has again rolled out cheerful figures. At the halfway stage, profits advanced by £1m to £5.7m, despite the problems created by our rainy summer. Underlying earnings per share rose seven per cent to 16.1p, and the interim dividend is increased eight per cent to 3.45p.

Burtonwood was once a traditional pub-owning brewer. But it sold control of its brewery to concentrate on its pubs and then retired from the beerage, disposing of its remaining minority brewing interest. It now runs a chain of nearly 500 managed and tenanted outlets. Most of its venues are, in these so politically correct times, known as community pubs. In days gone by, they would have been "back-street boozers". Still, by staying off the high street, Burtonwood has avoided the perils that have afflicted a host of trendy pub chains, ranging from Regent Inns to Yates.

The chairman, Richard Gilchrist, is confident that progress will continue in the second half-year and I would expect full-year profits to top £11.5m, against last year's £10m-plus. Burtonwood, which acquired 21 pubs and sold 10 in the half-year, joined the portfolio at 185.5p. The shares are now about 374p. I like the company and my present intention is to stick with it. On trading grounds, the shares are clearly a solid, long-term holding. As for Merrydown, I have decided to hang on for the time being. After all, an offer in the 140p-150p range seems a realistic expectation. It would be disappointing should the proposed bidder walk away. But such an eventuality cannot be ignored.

The important investment consideration is that Merrydown is in play. Should the predator disappear, then another may acquire the necessary thirst. The portfolio already has a handsome profit and the sensible approach would appear to be to sit tight. But even if an offer fails to materialise, I may well be tempted to sell the shares should they remain above 100p.

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