The Investment column: Bargain discovery for Enterprise

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The Independent Online
Enterprise Inns lived up to its name yesterday by snapping up rival pub chain Discovery Inns for pounds 46m in cash and raising pounds 33m through a three-for-eight rights issue at 196p a share to fund further acquisitions during the summer. The deal looks cheap, given that Discovery's advisers valued the company at pounds 55m, or 14 times historic earnings, when it was on the point of floating last December. It missed the boat and its venture backers are now selling out.

Enterprise is acquiring 277 pubs, mainly in Wales, the West Midlands and the West Country, and a business that made an operating profit of pounds 5.1m on a turnover of pounds 21.7m in the year to September, when net assets were valued at pounds 16.4m. The properties alone have just been valued at pounds 47.8m.

Enterprise will integrate the estate into its portfolio of 872 pubs, close 30 to 40 of the least viable, and convert most of the 45 managed pubs back into long-lease tenancies.

The chief executive, Ted Tuppen, claims this is more effective than ownership for pubs turning over less than pounds 10,000 a week.

Meanwhile, Enterprise has renegotiated Discovery's supply agreement with Whitbread, which will result in more Whitbread beers being sold in Enterprise pubs and bring a wider range of national and regional beers into the Discovery estate.

Merger costs of pounds 2m in the current year will buy annual savings in excess of pounds 1m from next year, so the deal should be earnings enhancing in 1997/98.

The acquisition came as Enterprise announced a 74 per cent rise in pre- tax profits to pounds 6.2m in the six months to 29 March. Most of the growth came from the acquisition of the John Labatt estate of 413 pubs for pounds 62m last June, but like-for-like income grew 8 per cent, appreciably ahead of the industry average.

Several more deals are under consideration, but the acquisition of surplus Pubmaster pubs in South-east England, where Enterprise is weakest, would make greatest sense.

At 242.5p, up 0.5p, the shares stand on a forward price-earnings ratio of 11, falling to 9, assuming profits rise to pounds 15m this year and pounds 21m next. An interesting punt in a currently fashionable sector.