Unhealthy diet of ice-cream and burgers

SHARES After rejecting demerger options, the new Grand Metropolitan may be too much like the old one
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THE rumours had more than a grain of truth in them. Five months ago investors were falling over themselves to buy Grand Metropolitan stock as speculation mounted that its Burger King fast-food division was about to be sold for pounds 2bn.

The company denied any such plans but, given Grand Met's proven propensity to spring deals on the stock market over the years, the whispers persisted and the shares raced to a 12-month high.

Interest in the story eventually waned - until last week when the retiring chairman, Lord Sheppard, admitted at the annual meeting that the idea of spinning off the food and drinks divisions had been examined but rejected.

He went on to sympathise with investors who had seen the value of their investment under-perform the FT-SE All Share index by 7 per cent during his tenure. "My wife and bank manager are beginning to get nervous," he quipped. "She knows when I get angry with the share price the only thing I can do is to go out and buy more."

Such chutzpah sits uneasily with the company that recently fuelled the "fat cats" debate when the boss of Burger King, which was found to be paying some workers pounds 1 or less per shift, collected a redundancy pay-off approaching pounds 1m.

Lord Sheppard, who bows out next Thursday after almost a decade at the helm, could be excused for being a bit demob happy. But the revelation that he, too, had considered emulating Lord Hanson and dismantling the empire he had built was startling in the extreme.

It raises questions about the legacy he has bequeathed to his successor, George Bull. In particular, has Grand Met passed its sell-by date?

Under Lord Sheppard's aegis, Grand Met has been transformed from a sprawling, mainly British-based rag-bag of 30 disparate businesses into an international- branded food and drinks group. Hotels, dairies and brewing interests were sold at or near the top of the business cycle to be replaced by household names such as Haagen Dazs, Smirnoff and Pillsbury, and backed by awesome marketing clout.

"It's a lot cleaner as a company now," says Colin Brown, sector analyst at US investment bank Goldman Sachs. "He's left a good inheritance," he adds, countering some City fears.

But writing in the latest annual report, Lord Sheppard admitted to some unfinished business. "My greatest disappointment was, of course, that the world went into recession before we had time to complete the reshaping of Grand Met," he said. "This put back the time when we could realise our true profit potential."

Unfortunately for Grand Met, many of those recessionary features have lingered. In the late-1980s, brands could command premium prices - but not today. Price-conscious consumers operating in a low-inflation, low- growth environment in which own-label products often offer a cheaper proxy for well-known brands see to that.

There was little in the latest update on current trading to suggest this trend was being reversed. While Pillsbury in the US continues to trade strongly, pushing through price increases in most products groups including Green Giant and Haagen Dazs, European foods still face an increasingly competitive environment.

On the IDV drinks side, the outlook for pricing has shown some improvement in both the US and Europe, though market conditions in the latter remain soft. Even Burger King, which continues to grow on a like-for-like basis in the US, is showing signs of running out of puff in parts of Europe.

Of course, Grand Met has an ace up its sleeve that should ensure profits keep chugging ahead. Last year the amount spent on brand marketing and advertising rose to pounds 1.1bn, the benefits of which should come through this year to push pre-tax profits to just short of a pounds 1bn.

That implies an undemanding p/e ratio of almost 14 at the current 436p price. But with Grand Met apparently committed to its present structure for the time being, shareholders seem condemned to a further period of underperformance. After all, incoming chief executive-elect George Bull is a dyed-in-the-wool Grand Met man, so a new dawn is unlikely.

Investors would be unwise to harbour takeover hopes. Few, if any, branded food and drinks groups could afford the huge goodwill write-off buying Grand Met would entail. Its balance sheet is so stuffed with intangible assets that shareholder funds are a negative pounds 700m if the value of high-profile brand names such as Smirnoff, Burger King and Haagen-Dazs are stripped out.

Against this unexciting backdrop the best course of action is to sell the shares.

Grand Metropolitan

Share price 443.5p

Prospective p/e* 14

Gross yield* 4.5%

1993 1994 1995 1996*

Turnover pounds 8.12bn pounds 7.78bn pounds 8.03bn pounds 8.41bn

Pre-tax profits pounds 625m pounds 654m pounds 920m pounds 990m

Earnings p/share 19.9p 21.6p 28.8p 32p

Dividend p/share 13p 14p 14.9p 16p

* Goldman Sachs estimates