Another pub, another dollar

Backed by a wall of American money, JD Wetherspoon is buying up properties and packing in drinkers
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The Independent Online
ONE OF the most intriguing features of the UK stock market is the way some of the highly rated blue chips have a hefty quota of American investors.

Mobile-phone operator Vodafone, electronic information giant Reuters, and satellite television broadcaster BSkyB all fit this pattern.

No obvious reason explains the apparent coincidence. Perhaps it has something to do with US investors being keen to pay a premium for high-technology sectors and concept stocks they understand at home and whose equivalents are thought to be undervalued over here.

Whatever the transatlantic forces at work, there has been one surprising and spectacular beneficiary in an industry far removed from the world of hi-tech: pubs group JD Wetherspoon.

Last week it replaced media-to-money broking group MAI in the FT-SE index of 250 leading shares, capping four years of dazzling growth. The step- up, which pushed the shares to even dizzier heights, followed a pounds 13.5m private placing at 786p with US institutions, taking their combined stake in Wetherspoons to over 40 per cent. The company now trades on a massive 30 times projected earnings and is worth pounds 340m.

One large US fund, Janus, is sitting on an 18.6 per cent stake. Wetherspoons' finance director, Richard Pennycook, welcomes the attention from across the pond. "We are demonstrably not a theme operator. US investors don't see us as a pubco, but as a retailer in the hospitality and leisure sector. That's a credible sector there. US investors are looking for us to roll out our format aggressively over here."

The company's expansion plans involve increasing the number of pubs from 133 pubs, 96 of them in Greater London, to a target of 1000 in the UK by an as yet unspecified date.

It marks the next phase in Wetherspoons' exponential growth. The company was set up by Kiwi Tim Martin, a barrister, who in true Victor Kiam fashion liked his local London boozer so much he bought the company.

Run-down shops, garages and banks in town centres were quickly transformed into pubs which appealed to a broad cross-section of drinkers. By the time it was floated on the stock market four years ago at 160p, Wetherspoons had 44 pubs. Now it is Britain's second biggest independent pub company after Greenalls.

Like most successful formulas, Mr Martin's is a simple one. All pubs have a no-smoking area, good air conditioning, no music and no pool tables. The atmosphere is relaxed and unthreatening. Fights are almost unheard- of - a factor Mr Pennycook says appeals to women. In fact, Wetherspoons' customer profile spans students to white-collar professionals, clubbers to pensioners . Cheap beer - Scotch bitter sells for as little as 99p - and high volumes are the other ingredients in this potent commercial brew.

Indeed, heading north out of Wetherspoons' traditional London "laager" has proved an inspired move. Some of its biggest sales are in new pubs in Manchester and Liverpool.

Critics say that Wetherspoons, like so many growth stocks before it, is merely riding for a fall. They point to the high level of borrowings required to fund the breakneck expansion. They say the balance of power is shifting back to the brewers and away from retailers. And they argue it is only a matter of time before sentiment among notoriously fickle US investors changes and sends the high-flying shares crashing to earth.

Mr Pennycook is having none of it. He is comfortable with a pre-placing gearing level of 63 per cent, while pounds 50m of debt finance for the next five years was secured on the basis that gearing would be kept below 80 per cent.

Wetherspoons, he says, should also be relatively immune from structural changes in the industry as it has five-year supply deals with Scottish & Newcastle and Courage which do not run out until 1999. And its bargaining power with the brewers should increase as the company grows.

The great unknown, of course, is what would happen if and when the Americans sling their hooks. Bass, in particular, has been mentioned as a possible bidder, but nothing Wetherspoons has done in the past few weeks suggests it is setting itself up for a trade sale.

Removing any bid premium would take some of the froth out of the shares and provide a buying opportunity. For the moment at least, it would be a mistake to argue with the wall of American money.