Whitbread buy tried and tested

The Investment Column

The acquisition of Pelican by Whitbread announced yesterday is an interesting case study in timing. It is a deal that investors looking to maximise growth while minimising risk could learn a lot from.

Whitbread realised it had little exposure to what it calls the urban casual dining market so well catered for by Pelican's chains such as Dome, Cafe Rouge and Mamma Amalfis. It faced two options, taking Pelican on at its own game or buying the company.

Clearly, buying an existing player carries some intrinsic risks. There is a danger that the management which started the operation will disappear at the first opportunity with its new-found wealth. Culture clashes are a potential problem. And goodwill has to be paid - in this case pounds 100m out of a total payment of pounds 133m.

The advantage of doing it this way, however, is that the formula is already tested. In the case of Pelican, a London-based concept has already been pushed out, tentatively, into the provinces and it appears to work.

So Whitbread is buying a proven but cash-strapped formula. If it has any sense, it will stand well back, let Pelican's management have access to its money, provide Pelican with the benefits of its better buying power and systems and watch its investment grow.

The technique is similar to the investment strategy of Mark Slater, son of Jim, and manager of a league-table topping unit trust. Using his father's investment philosophy he has started buying companies with a proven record of earnings growth, cheap relative to their potential growth rate, and which have already started outperforming the market.

As with buying shares, the formula applies to buying complete businesses and it would be surprising if Whitbread did not make a very tidy return out of Pelican.

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