Publand's Cinderella may need a rich sister

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The Independent Online

AFTER A sobering time as the Cinderella of the pubs business, little Paramount is at last beginning to display the sort of form which prompted its inclusion in the no pain, no gain portfolio.

AFTER A sobering time as the Cinderella of the pubs business, little Paramount is at last beginning to display the sort of form which prompted its inclusion in the no pain, no gain portfolio.

Last week it rolled out encouraging profits and disclosed it was involved in talks which could dramatically increase its trading operations. The shares are trading at 26.5p compared with the 15p when they became early members of the portfolio in April.

The pub expansion stems from the headlong growth of the Wolverhampton & Dudley Breweries as, with rival Greene King, it emerges as one of the nation's new-style of super-regionals.

Wolves, seemingly on the verge of acquiring the Mansfield Brewery, is busily reshaping its pubs estate, partly to cut debts, after its takeover earlier this year of Burton-on-Trent's Pedigree bitter brewer, Marston Thompson & Evershed.

It is selling 285 pubs for around £40m. Such a deal is out of the reach of Paramount which has an equity capitalisation of only £3.2m, although chunks of convertible preference shares, mostly issued as part of a rescue deal, will eventually swell its stock market valuation.

So the pubs chain needs a powerful partner and the word in the saloon bar is it has found one - none other than Nomura, the Japanese investment house which is Britain's largest pub landlord and a near 10 per cent shareholder in Paramount.

The idea, apparently, is for Nomura to buy the Wolves pubs then give Paramount a contract to manage them. As its pubs estate is just below 150, the Wolves deal could have a significant impact.

Paramount was among the first of the hyperactive breed of pub companies to emerge in the Eighties, around the time the Government threw the industry into turmoil by forcing the brewing giants to unload 11,000 of their pubs. But it ran into problems and new management, led by experienced pub man Paul Davies, was called in.

Five years ago, when the group was trading relatively well, the shares topped the equivalent of 79p. Then trading deteriorated. The Davies team sorted out the mess and after two years of losses, nudging £9m, the group achieved profits of £539,000 in the year to May, 1998. Last week it announced profits of £558,000 for its last financial year, ending in May.

Its performance is much better than it appears on the surface. After allowing for an exceptional credit in the previous year, true profits have more than doubled. For good measure, the current year started well, with first four-month sales ahead of last year's corresponding level.

But Paramount is again not paying an ordinary or preference dividend. So payments due on its preference shares continue to mount.

The group favours self- employed tenants in its pubs as opposed to managers directly employed by the company. It is, therefore, more closely related to Enterprise Inns than to the high-flying managed pub chains such as JD Wetherspoon.

Mr Davies has striven to improve the standard of Paramount's pubs, which had been neglected, as well as the quality of the people running them. His success is evident by last week's figures.

There are few details available about the Wolves pubs. It seems around 100 are former Marston outlets and the Pedigree group was not renowned for spending heavily on its estate. Still after turning round Paramount's once low-quality chain Mr Davies will be going into the deal with his eyes open.

For a tiny company, the pubs chain has an impressive band of shareholders. They include the Bass brewing giant and Greenalls, the former brewer now destined to be little more than a hotel chain.

Paramount's directors are well-endowed with options and are not big shareholders. But director share-buying helped justify the company's inclusion in the no pain, no gain portfolio in April.

At that time I commented on two other companies where directors had added to their share stakes. One was little Scotch whisky group Burn Stewart. Its shares, largely reflecting the share stake acquired by a Trinidad group, have since moved from 17.5p to 20p. But the other, food group John Lusty, is back around the 4.75p level it hit ahead of the director buying.