Bottom Line: S&N will not make the running without an extra leg

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The Independent Online
SCOTTISH & NEWCASTLE, the Theakston's ale and Center Parcs holiday operator, scoffed at suggestions that it was considering the purchase of Coral, the bookmaker, from Bass.

That is a pity. S&N is a good, well run company but without a fourth leg its performance is unlikely to excite.

The three legs it is running on at the moment all show signs of tiring. In brewing, operating profits fell back from pounds 99m to pounds 92m and profit margins slipped by a whole percentage point.

As well as Theakston's, S&N brews McEwan's Export, McEwan's Lager, and Newcastle Brown Ale. It also distributes Beck's lager in the UK. These are premium brands in terms of market position and alcoholic strength. Coors lager is the most recent addition to the fold, but it is hard to see it providing a quantum leap in profits.

The company has decided to keep the strength of its beers unchanged despite alterations to the excise framework that has led many brewers to water down their products. In the longer term S&N is right to stump up the extra tax and stand by its labelled products. In the short term, however, the move will cost it pounds 4.5m a year.

Profits and margins were also lower in its chain of 1,850 pubs. Fine-tuning the portfolio of pubs and producing cost efficiencies will provide some profit advances. Margins may be helped by serving more food too. But the Beer Orders mean S&N cannot expand its pub chain, so growth cannot be more than incremental.

S&N's strong brands and solid pub estate have given the company well appreciated defensive qualities. The cyclical element was meant to be its leisure operation. Center Parcs and Pontins produced better profits last year but the figures were not up by much - particularly given the benefits of currency translation that accrued from the businesses' Continental bias after devaluation of sterling.

Group operating profits for the 12 months to 2 May were pounds 224m, down 3 per cent. The picture at the pre-tax level was worse and at the bottom of City expectations. Hit by pounds 14m of redundancy costs and only pounds 2.3m of property profits (compared with pounds 8.5m last time), taxable profits were down 13 per cent at pounds 192m.

Earnings per share - including payoffs for the 600 workers made redundant and the reduced property contribution - fell to 33p from 36.4p. The dividend was lifted by an unexciting 4.5 per cent to 11.07p.

At pounds 400m, Coral was probably too ambitious a purchase for S&N. It may also have fallen outside the management's arena of expertise.

But the shares, down 5p at 456p, are almost exactly what they were a year ago: without acquisitions it is hard to see the shares moving far in the next 12 months either.