The Investment Column; Greenalls looking vulnerable

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GREENALLS, the struggling pub and hotels group, was again looking vulnerable to takeover yesterday after the group reported a sharp slump in half-year profits and a weak statement on current trading.

Analysts say Whitbread could be interested in Greenalls if its pounds 2.3bn bid for Allied Domecq's pub estate falls through. Other possible bidders include Bass, Scottish & Newcastle and South African Breweries.

Although Greenalls' pubs have been trading poorly they could be of interest to a financial buyer and its De Vere hotels business is regarded highly.

"In a consolidating market it looks like Greenalls' days of independence are numbered," said Nigel Popham, drinks analyst at Teather & Greenwood.

The shares closed 0.5p higher at 341.5p yesterday, supported by takeover speculation, although this is still below their underlying 350p asset value. Analysts suggest a break-up value of up to 470p per share, valuing the business at pounds 1.3bn.

Lord Daresbury, Greenalls' chief executive, declined to comment on takeover rumours. He claims the group's strategy of concentrating on managed pubs, hotels and its health and fitness clubs will bear fruit as these are growth markets. However, the half-year results undermined his comments.

Underlying profits on continuing businesses fell from pounds 66m to pounds 58m. Pre- tax profits were down from pounds 65m to pounds 24m, hit by pounds 17m of re-organisation costs and pounds 9m of losses on disposals, the pounds 340m sale of its tenanted pub estate and the pounds 28m sale of the Stretton Leisure gaming machine business. There was also a shock with the neglected wholesaling business slumping from profits of pounds 4.5m to just pounds 0.6m as brewers put the squeeze on margins.

In the remaining pubs business demand is weak with like-for-like sales down by 4 per cent on last year. Greenalls has suffered from having too many pubs in the poorly performing North-west and Midlands while it is under-represented in the South-east.

The new managing director Mark McQuarter wants to put more investment into fledgling pub brands such as Red Rose Inns, offering meals in the pounds 10-pounds 15 bracket, and Squares, its bars aimed at young drinkers.

But progress is slow. There are only 25 Red Rose Inns and 15 Squares outlets even though Greenalls first tested the concept 10 years ago. And Greenalls is up against more established concepts backed by more powerful players. Assuming full-year profits of pounds 116m the shares trade on a paltry forward multiple of 9. Hold for a bid. Nigel Cope