Derek Pain: G4S's strike at ISS has flummoxed the market

No pain no gain
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The Independent Online

The big guns are dominating the action at the no pain, no gain portfolio. Whitbread, the leisure group, has proved once again that it has the ammunition to survive the recession and the Spirit Pub chain has produced better-than-expected figures. But their rather routine efforts have been completely overshadowed by the sudden emergence of the dramatic takeover ambitions of security giant G4S.

I expected Whitbread to continue its profit advance but it was the much smaller Spirit that provided the greater satisfaction. Its shares, since arriving on the stock market following the split from the struggling Punch Taverns, have endured a rough ride, falling from 55p to 35p. Following the results they hit 50p as investors started to appreciate that the group, shorn of the sobering influence of Punch, has much going for it.

Spirit controls the managed element of the Punch estate, plus the more promising leased pubs. The managed outlets, embracing the long-established Chef & Brewer banner as well as other more recent brands, lifted sales by 5.2 per cent. Even the leased chain reduced its slippage. The result? Last year's pre-tax profits of £48.1m, up 17 per cent.

The portfolio paid 42p a time for the shares, recruited at the same time as Northern Petroleum, which has also made headway.

Of course, the pub business – free, managed, leased or tenanted – is enduring difficult times for all its participants. But there is evidence that managed outlets, with their greater buying power and strong ability to contain costs, are well equipped to face increasingly fraught trading conditions.

Yet even in the managed estates trading is volatile. Whitbread again experienced considerable success with its expanding Costa Coffee outlets and Premier Inn budget hotels. Its managed pub/restaurant chains, however, suffered a 1.6 per cent like-for-like sales decline, although new openings left the overall figure up 0.5 per cent. The group is making strenuous efforts to lift its restaurant contribution, largely by reducing prices.

Overall, the leisure group's half-time revenue rose 10.7 per cent to £891.3m with pre-tax profits at £188.9m (against £151m). I would expect around £310m for the year. Interim dividend is up 55.6 per cent to 17.5p, the sharp advance is to even out the two yearly payments. At the time of writing the shares are nudging 1,700p, against the 1,105p when recruited.

In spite of these profit performances, it is G4S that has dominated attention. Its £5.2bn strike at ISS has flummoxed the stock market. Some are bitterly opposed to the deal, claiming it is over-ambitious, not to say foolhardy. Others applaud the proposed takeover as not only brave and justified but an overdue overseas expansion by a top British-based company.

Until the deal was unleashed, the City had gone along with G4S's signalled intention of putting together a series of relatively small acquisitions, the so-called string of pearls. So it is not surprising that when chief executive Nick Buckles produced the ISS acquisition the stock market was wrong-footed and G4S shares crashed more than 20 per cent on the day of the announcement. They have since recovered some ground, reaching around 245p, but still look vulnerable. A few institutions have already expressed horror at such ambitious and costly expansion and Mr Buckles could have difficulty getting enough shareholder votes to get the deal accepted.

To help pay for this jaw-dropping reverse takeover, G4S is raising around £2bn through a heavily discounted rights issue as well as embarking on new borrowings and the proposed sale of some ISS interests. Cost-cutting is also likely.

There could, however, be little ISS fat to trim as the Scandinavian company is being sold by private equity owners who are likely to have already stripped out any unwanted interests and reduced costs to the bone. ISS has security operations but will take G4S into such areas as catering, cleaning and facilities management. Yet it is as a near pure security operation that G4S has thrived. It has to prove that ISS is an essential acquisition.

The portfolio paid 264p for its shares. It will be unable to take up its rights allotment, as each investment is confined to a £5,000 outlay. Still it should be able to enhance its coffers by selling its entitlement.