Arcadia remains an attractive gamble

Regent Inn; Sports Resource
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The Independent Online

Arcadia's decision last week to call off takeover talks with the Icelandic group Baugur has had an interesting effect on the share price. The shares dipped 13p to 257p on the day of the announcement. But after a slew of positive brokers' notes the shares have been rising steadily and now stand at 284.5p, in line with of Baugur's indicative offer price of 280p to 300p. The question for shareholders is what should they do now the bid looks to have gone away? Arcadia believes the Baugur bid is now dead in the water. And though Baugur is keeping its options open the price looks to have moved away from them.

The analyst community is certainly positive. CSFB has put a 400p price target on the stock while SG Securities has gone a notch higher with a 405p target.

The bull case is easy to see given the recovery fashioned by the chief executive Stuart Rose since he took over just over a year ago. Sales and margins are growing, cash generation is strong and cost ratios are improving too.

The Christmas trading statement, issued last month, showed like-for-like sales in the main six chains up by 9.4 per cent. Friday's statement said current trading continues to be strong with pre-exceptional profits expected to be not less than £52m for the six months to February.

The bear case has been less well aired. First there is the question of the 20 per cent stock overhang of the Baugur stake. That could depress the share price though Baugur's ongoing relationship with Arcadia (it is a franchise holder in its home country) means it will not want to pull the rug from underneath a trading partner.

The bigger worry is the outlook for consumer spending. Christmas was not the great boom many thought at the time and we have since had a profits warning from John Lewis. And Arcadia is highly operational geared with high fixed costs though a mostly leased property portfolio.

The benefit is that the business now focused on just six main formats such as Dorothy Perkins, Top Shop and Burton and is therefore easier to manage. Debts are also coming down fast and gearing could be just 16 per cent by August.

Assuming full-year profits of £88m the shares trade on a forward p/e of just 8. Still attractive, then, but not without risk.

Regent Inn

Despite the comedy club element in Regent Inn's pubs portfolio, yesterday's half-year results did not provide too much to laugh about. The group, which owns the Jongleurs comedy venues and the Australian-themed Walkabout chain, were hit by the lack of tourists, particularly in central London where underlying sales slumped by 12.6 per cent.

The company is still striving to prosper from a strategic U-turn which has seen it cast aside its older, unbranded pubs in favour of large, late-night, entertainment-led venues.

But the ambitious rollout programme, which aims to nearly double its existing branded units, is proving costly. Regent's chief executive, Stephen Haupt, is targeting 50 Walkabouts and 20 Bar Risa/Jongleurs by the end of next year. He also plans to create a third brand from the group's two late-night, food-led Pals units.

Walkabout is the group's undisputed star, clocking up a 13.3 per cent rise in underlying sales in the period, helped by the delayed Six Nations rugby matches. But the performance looks unsustainable and there have been some hiccups. Regent's Manchester venue, which combines all its offerings under one roof, has disappointed. The pressure will be on to make the £2.5m purchase of the giant Home nightclub in London's Leicester Square pay off.

To raise funds, Regent has embarked on piecemeal disposals of its London-based estate. Eight units went yesterday for £8.5m, though this will dilute earnings by about 4 per cent next year. Meanwhile debts of £69m give a gearing level of 126 per cent. Pre-tax profits before amortisation and exceptionals for the half year to 29 December increased by 5.6 per cent to £7.7m. The shares, down 13p to 165.5p look fully rated on a forward p/e of 14. Hold.

Sports Resource

Sports resource Group, the sports management and sponsorship outfit which looks after football stars like Chelsea's Eidur Gudjohnsen, has suffered a corporate groin strain. The weakening economy on the final quarter of last year meant new deals just couldn't be signed or existing contracts renewed. Then the Prost Grand Prix team collapsed owing £21m overall, including £250,000 to Sports Resource. The result was a thumping profits warning with full-year profits now expected to be £2.3m compared to analyst forecasts of £3m. The shares fell 21.5 per cent to 47.5p yesterday.

It is quite a setback for Christ Akers, the man who sold Sports Internet to BSkyB for £300m, He floated Sports Resource on AIM in September 2000 and the shares had an initial run up to 190p. It was a shell company floated to buy up companies in the growing but still fragmented markets of sports sponsorship, athlete representation and television rights negotiation. There has been a flurry of deals including Alan Pascoe's Fast Track athletics business and Wind Group, a sponsorship operation based in Switzerland.

But Mr Akers is optimistic. Sports Resource has £8.3m of cash which can protect if from the downturn and enable it to snap up rivals which struggle. There have also been some contract wins such as a major sponsorship deal for the Ferrari formula 1 team, while Fast Track has also signed new deals.

The shares trade on a forward p/e of 14. An interesting company but the shares don't look an attractive bet in the current media environment.

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