Mr Punch aims at Allied Domecq

News Analysis: Can Hugh Osmond outmanoeuvre Whitbread in the battle for 3,500-strong pub estate?
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The Independent Online
PUNCH TAVERNS, the privately controlled pubs group, yesterday confirmed that it plans to make a cash offer for Allied Domecq's 3,500- strong pub estate on terms "superior" to those offered by rival bidder Whitbread.

The bid, which has been rumoured for weeks, is expected to be pitched at around pounds 2.7bn compared with Whitbread's pounds 2.4bn all-share alternative.

Punch also confirmed that it is in talks with Bass over a deal that will allow the Carling Black Label brewer to buy a "significant number" of Allied's managed pub estate for pounds 1bn. The funds would help underwrite the Punch offer and enable Bass to convert the best of Allied's pubs into Bass's main pub formats such as Harvester, All Bar One and O'Neill's.

Hugh Osmond, Punch's chairman, said: "On 25 May, Allied Domecq said `If anyone wants to enter the bidding it's up to them.' We are accepting that invitation and intend to discuss our offer with them."

If Mr Osmond does table a bid later this week, it will be a considerable embarrassment to both Whitbread and Allied Domecq, which have both under- estimated the determination and financial fire power of this 37 year- old entrepreneur.

The former restaurateur has run a high-profile media campaign that has kept his intentions in the newspapers on a daily basis although he has yet to show the colour of his money. He has made larger, publicly quoted companies look at best foolish and at worst, potentially guilty of a failure to achieve the best value for their shareholders.

So far, it is a case of Young Upstart 1 Experienced plcs 0.

One analyst said: "Personally I think Osmond is neck and neck with Whitbread. He has certainly given them and Allied a run for their money."

Mr Osmond has certainly come a long way in little more than a month. In May, when word of the Allied-Whitbread deal first leaked, Punch immediately said it was also interested, but it was scarcely regarded as a credible bidder.

A young-looking 37, Mr Osmond is best known for building Pizza Express into a success with partner Luke Johnson. He also made a tidy fortune with another restaurant business called My Kind of Town, which was bought by Capital Radio.

All this has left Mr Osmond not just wealthy, he is also not short of self-confidence. "My fan club alone puts a couple of points on the p/e," he is once said to have crooned to a City analyst. He has also made some unkind and rather ill-advised remarks about the quality of Allied Domecq's management.

But from a standing start little more than a month ago, Mr Osmond has recruited heavyweight financial backers in the shape of Texas Pacific, the US venture capital group, and a string of muscular City advisers, including Credit Suisse First Boston, Morgan Stanley and Arthur Andersen.

He has complained to the Office of Fair Trading calling on it to look at Whitbread's dominance of the pub industry if the deal goes through. He has also, his advisers claimed, managed to find a way around the tax problem under which Allied shareholders would have found themselves liable to a hefty capital gains charge should Allied sell its pub estate for cash.

None of this makes Allied look very good. Its deal with Whitbread has always had the whiff of a cosy stitch-up about it. It signed a contract with Whitbread granting it exclusive negotiating rights. It then claimed those rights would lapse when Whitbread tabled its offer only to allow them to continue. This means that Punch has not been privvy to the information supplied to its rival. Allied now admits this was badly handled.

However, Allied insists it has conducted itself properly. A spokesman says: "What Allied has done is ensure that it has a legally binding contract at a good price with Whitbread. We have not seen an offer from Punch yet, but if and when we do it will be considered carefully.

"But the company will be at pains to ensure that it does not accept a rival offer which at face value looks higher only to find that it collapses and then Whitbread walks way."

Allied issued a statement yesterday saying that if Punch does table a bid Allied will be looking at four key aspects: the price and tax consequences, the extent to which the offer is backed by unconditional and irrevocable finance, whether the offer is legally binding and has any conditions attached, and the time it will take to complete.

If Mr Osmond's offer passes muster on all these points he will still have some hurdles to clear. He must make a knock-out blow before 2 July when Allied's shareholders are due to vote on Whitbread's deal. It may have to be higher than the implied value of pounds 2.8bn-pounds 3.1bn some analysts are attaching to the Whitbread deal if it goes though.

But Whitbread's deal is not without problems of its own. Critics say that its plan to de-merge its brewing interests will leave Allied shareholders with a proportion of their Whitbread shares in a vulnerable brewing operation. The central concern is that Whitbread's licence to brew Heineken is up for renewal in 2002 and its Stella Artois deal in 2007. It is these worries that are causing such wide valuations of the brewing division with analysts' estimates varying between pounds 250m and pounds 800m.

Whitbread remains confident that its deal will be accepted. But if Punch can pack sufficient firepower behind its offer both David Thomas, chief executive of Whitbread, and Sir Christopher Hogg, chairman of Allied Domecq, will be left with egg on their faces, even though the latter will have a higher sale price to ease the pain. As one analyst puts it: "It worked out much more interesting than anyone can have anticipated."