"We are not keen on brewing per se," says Finlay McLaren of Edinburgh Fund Managers. "It is not an attractive business because brewing volumes are in decline."
The Share Centre's Damian Larkin says: "The UK brewing market remains very complex. It is still oversupplied and vulnerable to increased imports. Demand hasn't been favourable either."
Brian Tora of stockbrokers Greig Middleton says: "It is a mature sector that changed from being a brewing-driven industry because the 1989 Beer Orders limited to the big brewers to owning 2000 pubs.
"So they have been churning their pub estates but retained brewing, because it can maintain good volumes and good margins. You cannot get many more synergies out of brewing, so these companies have been looking at where they can get the best return, and that is not necessarily from making beer."
Christopher Willmott, director of institutional equities at Hill Samuel, says: "Companies are focusing on either brewing or pub retailing. For companies that can get either of those businesses right, the potential for enhanced returns on those businesses could be huge."
The emphasis is increasingly on those outlets which sell drinks rather than make them. " `Concept retailers', such as Yates and Wetherspoons, have tended to be new developments, so they are not saddled with pubs in unattractive locations," says Billy Whitbread, manager of Aberdeen's Taverners Investment Trust, the only UK-based fund to concentrate on the sector. "The national brewers made the mistake of trying to shoehorn their assets into the concepts they already have."
The picture is similar for the major drinks retailers of the Beverages sector. Christopher Willmott says: "Some of the increases in sales volumes of individual spirits brands have been very impressive, but the question is, `What is happening to the bottom line as overall volumes are remaining stable?'. The companies which were successful have a few premium brands but they have been driving those brands very hard. The problem for the international spirits companies is that their tails are very long - they have a lot of brands that are not profitable."
As far as UK investors are concerned, "international drinks retailers" means Diageo and Allied Domecq. "For both companies, the real story is this dichotomy of premium brands and tail brands," Mr Willmott adds. "The holy grail is to find a spirit brand equivalent of Coca-Cola and they haven't got there yet. Most investors are waiting to see whether the creation of Diageo has been a success."
Damian Larkin says: "The outlook for spirits companies is still grim. We have seen Diageo making itself bigger in order to make itself better and we are still waiting to see if that has actually worked. But what it has done is force Allied Domecq to take action of its own."
Which leads us back to the business of brewing and pubs, because Allied wants to offload its pub estate, with Whitbread the front runner to buy. "There is a feeling Allied is negotiating from a position of weakness and really should be seeking some higher bids," he adds. "But who- ever wins the battle for Allied's estate at the right price is on to a winner, especially if it goes to Whitbread or Bass who have shown they know what they are doing. Allied should also be able to do something with the cash to enhance earnings."
For small brewers, the picture is less positive. "Regional brewers tend to concentrate on real ales and real ale volumes fell quite significantly last year," says Finlay McLaren. "There is no particular demand for beer." Brian Tora says: "Regional brewers can survive only if they get their marketing right. They have either got to have a good brand or the size of their pub estate must match their capacity in order to maximise cost efficiency".
Billy Whitbread says: "I have invested a little in regional brewers recently, as some of these are really tenanted pub companies with breweries attached. They are steady earners.
Fuller Smith & Turner has recently produced the very strong `Fine Line' pub concept. It is a well-managed company operating almost as if they were a concept retailer but as a brewery. They still have a very strong beer brand in London Pride, which is increasing at 15 per cent per year, and a very conservative accounting policy."
Prospects for smaller retail companies are much brighter. "I invest in the smaller companies," says Billy Whitbread. "I think we are going to see some good news there. Surrey Free Inns, my biggest investment, is already running 7 per cent ahead on a like-for-like basis."
Whitbread also has positive words for his fund's second-largest holding, Enterprise Inns. "Enterprise Inns has just done a stellar deal with Century Inns, which will probably give it a 10 to 15 per cent earnings enhancement next year. People are realising that tenanted pubs are very steady earners."
Finlay McLaren says: "One of the key factors has been the break-up of the vertical integration of the brewers, following the 1989 Beer Orders. Since then, independent retailers have been calling the shots more and more."
Things may be changing. "Effectively you have two major brewers and the balance of power may moving back to them," he adds. "As the independent chains get bigger, they have to source from major suppliers, which limits their choice."
The major effect of the beer orders has been to force brewers to decide whether they wish to be either producers or retailers.
Brian Tora adds: "Bass said last week it is committed to brewing and wants to develop its estate, but they can't get any bigger in pubs. They will look at which business offers the better prospects and probably float the other one off."
Damian Larkin says such diversity is positive. "If there were any major companies that were just breweries, we would not be very keen," he says. "But Bass also has an excellent Hotels & Leisure business and so does Whitbread. Bass' hotels business is up 30 per cent and there is good growth in some of their branded pubs as well."
Finlay McClaren says: "The major operators have been reducing the discount on beer sales in recent years and there is very little opportunity to squeeze more out of that side, so they are going to have to increase the amount they get from their tenanted pubs.
"As a result, you are going to see a drop in the earnings from these tenanted operations, which, in turn, will reduce the amount of capital flow from these businesses. Which is why the tenanted pub companies have to keep doing deals in order to move in the right direction."
Damian Larkin says: "Our view on the sector is similar to that for the economy as a whole, in that it has been poor for a while and looks likely to improve. That is why sentiment has been improving and was backed by the Bass statement. Although its profits were down on expectations, the fact that trading was up over recent weeks is a positive sign."