Sell while shares are frothy
Sunday 24 March 1996
They bounced off a five-year low on reports that rival brewer Bass was in talks to buy its interest in Carlsberg-Tetley, the brewing joint venture it set up in 1993 with Carlsberg.
A year ago, this column noted similar moves were afoot to sell the 50 per cent stake, possibly to Whitbread, saying: "This would be a historic deal, for it would mark Allied's departure from UK brewing - its original business - and show how marketing-led chief executive Tony Hales is transforming the group's philosophy."
Extracting itself from the unhappy Carlsberg-Tetley experience is clearly proving tricky for Allied Domecq. Whitbread has walked away, while Carlsberg's right of first refusal to the other half of the joint venture only complicates negotiations.
Regulatory issues aside - the combined market share of Bass and Carlsberg- Tetley would be close to 40 per cent - the main sticking point is likely to be price.
Analysts are sharply divided about how much Allied's stake is worth. Estimates range from pounds 150m to pounds 500m depending on whether lucrative supply contracts to Allied's 4,000-plus pubs, which end in 1997, are renewed.
Carlsberg-Tetley is Allied's biggest problem child. Volumes and margins are under pressure, and the group recently announced 500 redundancies. Any move that frees management time at Allied and reduces uncertainty ought to get a positive response from investors as long as the price is high enough.
Selling the Carlsberg-Tetley stake would also help bolster the balance sheet. Debts of pounds 1.7bn represent a chunky 70 per cent of shareholders' funds though, unlike rival drinks group Grand Met, conservative Allied does not include brand values on its balance sheet.
With Allied all but out of brewing and food manufacturing, the big question remains of how to make the remaining assets work harder.
Nobody doubts that Allied has a strong brand portfolio. The spirits division, which takes in Teacher's whisky and Beefeater gin, ranks as number two in the world when measured by sales volume of the top 100 brands, while retailing includes 1,500 Victoria Wine off-licences, more than 8,200 Baskin Robbins and Dunkin Donuts franchised stores, and themed pub-concepts such as Firkins and Scruffy Murphy's.
But trading is tough and an unexpected slump in spirits sales means interim profits in May will be down by around a fifth.
The recent profits warning, the second in seven months, showed once again that size alone is not enough to ensure value is unlocked for shareholders. It also raised further doubts about the industrial logic of combining an international branded spirits business with a UK pubs operation.
Sadly, Allied Domecq declines to comment on these issues. Such reticence may have something to do with arrival next month of highly respected Sir Christopher Hogg to replace Michael Jackaman as chairman.
Sir Christopher, no stranger himself to resuscitating stretcher cases, is likely to conduct a strategic review that may reach the same conclusion as the ABN-Amro Hoare Govett analyst, Julie Bower, that Allied "has the potential to be a much stronger retailer than a spirits marketer". Allied could be worth almost 700p a share on that basis.
It would be no surprise if Allied chose to go down the break-up route. After all, it has been a dedicated follower of the latest business fashion for many years, as a former, well-placed employee recalls. "Allied was always number two or three and tended to follow what the market leaders were doing. Senior management simply wasn't good enough."
But Allied has also danced to the City's tune too often - and to no avail. In the rush to focus on just two divisions, trophy assets such as Tetley tea bags were sold for too little while pounds 739m was surely too much to pay for Domecq.
For this reason alone, Sir Christopher may do well to resist pressure to go the whole hog (no pun intended) and split Allied in two.
Instead, his first task may be the onerous one of cutting the thinly covered dividend. Broker UBS remains negative on the shares, noting that they stand on a 6 per cent premium to the market but offer weaker underlying profits growth in spirits than either Grand Met or Guinness.
Selling them on the back of recent strength looks the best option until the big picture becomes clearer.
Activities: Wines and spirits (Lamb's, Beefeater, Teacher's, Cockburn's, Harveys, Courvosier); retailing (Victoria Wine, Dunkin' Donuts, Baskin Robbins, Scruffy Murphy's, Firkin, Ind Coupe, Taylor Walker, Ansell, Tetley); brewing and wholesaling (Carlsberg, Tetley, Castlemaine XXXX, Skol).
Share price 508p
Prospective p/e 15
Prospective gross yield 6.2%
Dividend cover 1.4x
Year to August 1994 1995 1996* 1997*
Turnover pounds 5.62bn pounds 6.05bn N/A N/A
Pre-tax profits pounds 635m pounds 635m pounds 600m pounds 620m
Earnings p/share 38.2p 37.7p 34.7p 35.7p
Dividend p/share 22.7p 27.6p 25.0p 26.0p
* UBS estimates
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