Outlook: What next for S&N's Froggatt now that the pubs are gone?

Carlton/Granada; Barclays

Scottish & Newcastle has focussed itself wholly on brewing in finally agreeing yesterday to sell its pubs, restaurants and hotels business to Spirit Group Holdings for £2.5bn, but in so doing has it not become just a smaller version of other more powerful international brewers - Anheuser Busch, Interbrew, SABMiller and Heineken?

As for the dramatic re-rating that fund managers and analysts promised in urging the divestment strategy - a strategy which they suggested would put the company on the same earnings multiple as Interbrew and the rest - that simply hasn't happened, so was it entirely wise to sell off a pubs estate which its venture capital buyers expect eventually to make a huge turn on? Perhaps not, but it's hard to see what else the new man at the helm, Tony Froggatt, could have done.

The die was cast when Scottish & Newcastle bought into Kronenbourg, thereby committing itself to getting bigger in brewing rather than pubs and hotels. Mr Froggatt's first priority in becoming chief executive last May was to clean up the balance sheet mess the strategy had left behind, not reverse it. In selling the pubs to Spirit, Mr Froggatt, a no nonsense Aussie, has managed to secure his breweries a seven year supply deal. Admittedly this has been at the cost of a £14m annual reduction in the amount he charges for his beer, but the upshot is that he has achieved north of £2.5bn in disposal proceeds, which nobody initially thought possible and which makes a big inroad into the company's mountain of debt.

At the earnings level, the deal is dilutive, yet the effect on cash flow is broadly neutral, with the savings on borrowing costs cancelling out the loss of profits. The company will still struggle to pay even the reduced dividend announced a little while back out of free cash flow, but if Mr Froggatt is as good as his word in delivering the promised improvement in operating margins and sales, then there shouldn't be too much to worry about.

Still, for the time being, there's little headroom for spending on acquisitions, assuming there's anything decent left to buy. The low hanging fruit has already been plucked. Mr Froggatt can only look on enviously while the other big four international brewers pick off what remains on the upper branches.

S&N's most promising asset right now is its 50 per cent interest in Baltika, Russia's top selling beer, and Europe's number two selling beer over all. The other partner is Carlsberg, which might make a good partner all round for S&N if the complication of it being owned by a charitable trust could be overcome. The other obstacle would be in the UK market, where brand disposals would be required to bring the combined market share down to an acceptable level.

The decision to dispose of the pubs was apparently taken before Mr Froggatt arrived, though it has never been entirely clear who took it as the chairman, Sir Brian Stewart, had for years resisted the move. No matter. It's done now. What comes next is very much Mr Froggatt's show. Is it a question of bid or be bid for? Or can S&N make do as a tiddler among larger beasts? Mr Froggatt can take heart from the fact that SABMiller is in no fit state to bid for anyone, while Interbrew would be ruled out on regulatory grounds. Yet in order to compete effectively with the superior resources and marketing clout of larger companies, S&N has to get bigger.

Carlton/Granada

Carlton and Granada's planned merger was again the talk of the City yesterday as speculation on a positive ruling from the Competition Commission reached fever pitch. Some newspapers claim already to know the outcome, to be announced at 11am today, in reporting that the Commission has settled for behavioural remedies, rather than the structural ones demanded by advertisers, but I wonder if they've really got the nod, or whether they are not just regurgitating the Granada spin.

Certainly the behavioural solution would represent the best possible outcome - other than unconditional clearance, which was never on the cards - for both Carlton and Granada, and because the so-called "contract rights renewal" approach was Granada's idea, it would be quite a feather in the cap for Charles Allen, chairman of Granada. If he's convinced the Commission that this is all that's required to safeguard the interests of advertisers, then the City might even let him keep his job.

Under the proposed Granada remedy, existing contracts between ITV and advertisers would be rolled over for a period of three or more years, with any further decline in audience market share reflected in more discounts. Many advertisers have dismissed the solution as unworkable, and insist on divestment of both companies' sales houses instead.

Even in these extreme circumstances, Granada might still be prepared to do the deal, provided the two houses were not incentivised to compete against each other. Yet if they were not it is hard to see the point of divestment as a remedy in the first place, and I doubt whether Carlton's Michael Green would in any case want to play ball under these conditions.

The bottom line is that only a lesser series of conditions would allow the deal to happen, and since most commentators agree that the creation of a single ITV is essential to guarantee the channel's future in an era of multi-channel TV, that means the competition authorities must have settled for the least onerous set of remedies, must it not?

Perhaps, but if it hasn't, then there's an awful lot of downside in the Carlton and Granada share prices, up a further 9.5 per cent and 6.1 per cent respectively yesterday. We'll know soon enough.

Barclays

Matthew Barrett has apparently decided he's had enough of Barclays after four years as chief executive. He's being offered the opportunity to succeed Sir Peter Middleton as chairman, but despite the pleasure this would give him in contravening the spirit of the Higgs reforms on corporate governance, which state that the chief executive shouldn't be elevated into the role of chairman, he's refusing to bite. He's got family back in Canada, and as a wise cracking Irish Canadian, he wouldn't in any case have felt entirely comfortable with the largely ceremonial role that still goes with the job of being a Barclays chairman.

Mr Barrett was second choice as chief executive after the turmoil of Martin Taylor's dramatic ousting, the first having only been there a day when a routine medical unearthed a heart murmur that frightened him back to his native America. Whether the Barclays board was entirely aware of Mr Barrett's personal life when it recruited him isn't clear, but it must have come as a shock to the stuffed shirts of Lombard Street when they opened the press that morning to discover not pictures of their triumphant new appointment, but of one of his former conquests clad in a leopard skin bikini.

Mr Barrett has never been just another man in a suit, and that's actually been his main contribution to Barclays. He's completed the process begun by Martin Taylor in changing the culture, clearing out the cobwebs and putting the bank on a more "can do" footing. His regret must be that he has not managed to transform Barclays into another HSBC or Royal Bank of Scotland Group. For that he needed a major transaction, yet somehow or other it has eluded him. But he has got rid of the delusions of grandeur, the belief that Barclays can for ever trade on past glories. The sometimes fractious banking dynasties that once ran Barclays are now utterly gone as well.

It's a shame Mr Barrett has decided against the chairmanship. The City will miss his wit and wisdom, and Barclays will miss his guidance.

jeremy.warner@independent.co.uk

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