I often enjoy a pint of beer, so perhaps it’s not so surprising that the drinks industry has made prominent – and much appreciated – contributions to the No Pain, No Gain portfolio.
But last week was hangover time, when Stock Spirits, a vodka producer, distilled a profit warning that sent its shares crashing more than 25 per cent. Having to absorb such a shock cast a shadow over my current success, Spirit Pub Company.
Still, the portfolio has reaped rich rewards from the consolidations in drink and related industries such as leisure. The takeovers of the once-great brewing giants Allied Domecq and Scottish & Newcastle produced remarkable profits. So, too, did many smaller players such as former brewer Burtonwood, the Capital pubs chain and the Merrydown cider business. Montana and La Tasca were restaurant successes. In addition, the Prezzo chain, currently the subject of a takeover bid, was sold at a handsome profit. There have, of course, been failures such as Pubs ’n’ Bars.
But overall it is a story of success that is being continued by current constituents Essenden, Marston’s, Whitbread and Spirit – but not, at the moment, Stock.
Its profit warning, amid higher taxes in Poland (its main market) and increased competition, caught the City on the hop. The shares, floated a year ago at 235p, slumped to 225p against a 316p high. Director buying lifted the price to around 250p but, as I write, it is 245p. The portfolio arrived in April at 278.75p.
Stock’s crash will adversely influence stock market sentiment towards the vodka group. After all, it was only in September that City researchers visited its Polish operations. Few seemed to pick up on the way things were going. Now City expectations for the year’s profits have been slashed from £60m to £52m.
Should, as seems likely, Spirit fall to a takeover bid, I will sell the portfolio’s shares before the offer goes through.
It is not that I have anything against Greene King, the most likely successful bidder, or the outsider, C&C. Such a decision stems from the portfolio’s constitution, which stipulates that £5,000 is invested in each group. So with Greene King’s bid mostly in shares with a little cash, the £5,000 rule would be jeopardised. A similar intervention by C&C would also be unacceptable.
Any readers who followed the portfolio into Spirit and so picked up shares at around my 42p price may take a different view. But they should sit tight for the time being. Greene King’s offer is, in my view, not particularly generous and a rival assault from C&C – or another group – cannot be ruled out. After all, in the current environment Spirit’s 1,200 managed and leased pubs are prize assets. They represent some of the best still available and Spirit has already spent heavily improving most of them.
True, Greene King’s offer looks reasonable against Spirit’s share price before the bid emerged, but the pubs’ rarity value should also be considered.
Essenden, the ten-pin bowling chain capitalised at only £14.8m, has been in action, splashing out £650,000 on a centre in Doncaster that has “traded strongly” in the past two years. The group has also re-arranged its amusement machines contract, which should produce beneficial results. The shares, now 69p, were acquired by the portfolio two years ago at 24p.