Enterprise Inns foxes doubters:The Investment Column

Enterprise Inns came to the market last November bravely flying the tenancies flag in the face of a stock market in love with the idea of the glossy managed pubs run by companies such as Tom Cobleigh, JD Wetherspoon and others. We were not alone in questioning whether the company would succeed in its bid to persuade the City that it was anything other than a rather dull rent collector and thought its price-earnings ratio of 9 at 145p was harsh but appropriate.

In doing so we missed a good opportunity. The shares rose 11p to 194p yesterday as the company announced the acquisition of John Labatt's 413 UK pubs and despite a small one-for-six rights issue at 153p to raise pounds 9.5m towards the pounds 61.5m cost of the deal. As if to put two fingers up to doubters such as this column Ted Tuppen, chief executive, confirmed that he would be converting 165 managed pubs in the estate to tenancies, swimming right against the prevailing tide in the industry.

Wrapping up the announcement, Enterprise also confirmed solid growth in its existing business with a 9.3 per cent rise in earnings growth excluding exceptional items to 7.31p after a 26.5 per cent rise in profits to pounds 3.5m from a 6 per cent sales up-lift.

The John Labatt deal, which followed the recent sale to Whitbread of the Labatt UK brewing rights, seems to have presented a nice opportunity for Enterprise to double its portfolio and grab attractive economies of scale for a sensible price. At pounds 20m less than net assets, the buying price reflects the desire of Interbrew, Labatt's new owner, to get shot of a non-core business.

There also seems to be method in Mr Tuppen's madness in turning the managed pubs back into leases. With some creating turnover of only pounds 3,000 a week they simply do not merit much management time. As a cash-generative rent generator and ready market for Enterprise's new seven-year supply deals with Bass and Whitbread, they will more than pay their way.

It is a good deal, but after their recent rise the shares would appear to already reflect the good news. Hold.

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