Money: There's no rest with leisure

Magnus Grimond surveys a sector whose diverse companies promise excitement and despair in equal measure
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RANGING from Manchester United to Beirut casinos, leisure companies are an oddball grouping of shares and have given investors an appropriately roller-coaster ride. The rise and fall of football club shares since 1996 is just the latest in a string of spectacular corporate comets that have fallen to earth.

The history of Brent Walker, built up by former boxer George Walker, should be a warning to any company contemplating massive acquisitions in today's overheated stock markets. With an empire ranging from dog tracks to the Brent Cross shopping centre in north-west London, Brent Walker's undoing was the massively over-priced pounds 685m acquisition of William Hill, the betting shops chain, in 1989. By December 1993 the group had clocked up losses of pounds 1.2bn. The shares, which peaked at over 400p, dived and have now been delisted.

Football is a different vale of tears. Probably uniquely in the stock market, it is a sub-sector driven almost entirely by private shareholders. Most of these punters are fans, not investors. "Rather than buying a scarf, they buy some shares. Whether the shares are pounds 2, pounds 200 or pounds 2,000, the price is not what they are interested in," says Nick Batram, football clubs analyst at stockbrokers Greig Middleton. "People tend to ignore the management or the profitability of the clubs."

Instead, football shares still have a tendency to soar or sink on a Monday morning depending on the team's weekend performance. Fine if it is a crucial match, such as last year's defeat of Sheffield United by Crystal Palace, which kept the northerners out of the Premier League and cut United's share price by 30 per cent at a stroke. Much less easy to understand if it is just one of the many other games played during a season.

It is now obvious that football shares were bid up far too high since relatively few clubs cash in on the huge new revenues coming into the industry. The disparity is huge. The 72 clubs of the Football League share around pounds 29m a year from selling television and sponsorship rights. Compare this with the pounds 734m in TV revenues that the 20 clubs in the Premier League are set to pick up over the next five years.

It is notable that out of the 20 publicly quoted clubs, the combined profits and losses of 18 of them over three years to 1996 are almost equal to the total profits of just two. Those two are Manchester United and Tottenham Hotspur. While Spurs continue to struggle on the field, most City folk only have eyes for Man U. With pounds 40m in the bank, an estimated 3 million fans and an international brand name, no other club comes close to matching its financial strength. Little wonder it plans to start its own TV station. But on a forward price-earnings ratio of around 22, it will have to do well to justify its rating.

Away from football, the rest of the leisure sector has also been having a torrid year. Over the past 12 months it has underperformed the stock market by about as many per cent. Much of that is due to the performance of two of the sector's giants, Granada and Rank, whose differing fortunes show how hard it is to make generalisations about the industry.

Up until the early part of last year Granada, and more particularly its chief executive Gerry Robinson, was the darling of the stock market. It was an odd love affair because Mr Robinson's seven years in charge have been a throwback to the unloved conglomerate days of the 1980s. A string of acquisitions, including the pounds 3.9bn takeover of the Forte hotels group, has made Granada's businesses more disparate than ever. After quintupling since Mr Robinson's arrival, the shares have, in effect, gone nowhere for the past year, hit by a string of jitters ranging from Granada's move into digital satellite broadcasting to signs of a slowdown in contract catering.

Over at Rank, new management has had, if anything, the opposite effect. Chief executive Andrew Teare has presided over a 40 per cent drop in the share price since taking over two years ago. Despite his best efforts to focus a conglomerate whose businesses range from Butlin's holiday camps to video duplication, the City is unconvinced.

Making generalisations about leisure may be dangerous, but the stock market still tries. Indeed, one of the reasons for the sector's recent dire performance is that nobody in the City quite believes its bounce- back from the recession can continue. The current strength of the pound and fears for the economy are hitting sentiment. A strong pound discourages tourists from coming to Britain, while leisure spending is the first to be hit when locals begin to feel chill economic winds.

Leisure analysts, however, think the gloom is overdone. Bruce Jones, at stockbrokers Merrill Lynch, admits that growth in the economy may slow this year and consumer spending decelerate. But he still thinks expenditure will grow by a healthy 4 per cent this year, before dropping sharply to 1.5 per cent in 1999. If he is right, certain parts of the sector should continue to do well. Hotel groups like Stakis, for instance, have certainly been confounding the sceptics by reporting rising demand and room rates.

So there is growth to be had in the leisure sector if you know where to look for it and strike lucky. But it does seem to have more than its fair share of dogs. And ultimately, in the words of Mr Jones at Merrill Lynch: "If you are nervous about the economy, stay away."