AT FIRST sight the acquisition by Brake Bros, the chilled food supplier, of the Watson & Philip's food wholesale business looks like a cool move.
For little more than pounds 43m in cash, Brake becomes the UK's second-largest supplier of dry food to the catering industry, adding to its market leading position in the supply of frozen food. It will also acquire the Watson & Philip's name, with W&T being renamed Alldays after its convenience store chain. Brake will benefit from the good fit of the two businesses, both in terms of cross-selling and distribution. On the former, Brake will be able to bundle together its chilled and dry food offering, tempting its 60,000 customers with discounts. On the latter, the integration of Watson & Philip's 10 depots, plus the merger between the two companies' distribution services, will boost returns and keep overheads down. A perfect recipe, then? Not really.
Before embarking on a buying binge, investors should consider the state of the market. The bulk of Brake/W&T's customers are pubs and restaurants, which are being savaged by the economic downturn. As the recent profit warning from Bass, the pub giant, has shown, when the economy turns nasty, patrons give pub grub a miss.
The second problem is low margins. W&T's wholesale business turned over pounds 182m last year but its operating profits were just pounds 4.6m. With the economy tilting downwards, it is unlikely that margins will climb above a wafer- thin 3-4 per cent. Brake Bros shares took a tumble earlier this month, when the company warned of tough trading conditions. They closed unchanged at 610p yesterday, more than 40 per cent below their 12-month peak. This is still a multiple of 15 times 1998 earnings forecast at about pounds 30m. Given the uncertainty on consumer spending, they are no more than a hold.