Greene King refuses to rest on its Laurels

Buoyed up by strong results, Greene King is back on the acquisition trail with its £654m deal for Laurel's community pubs. John Porter looks at a...

Buoyed up by strong results, Greene King is back on the acquisition trail with its £654m deal for Laurel's community pubs. John Porter looks at a strategy that bucks industry trends.

Some might call it swimming against the tide, while Greene King chief executive Tim Bridge prefers the phrase "not afraid to be unfashionable". However you characterise the particular brand of non-conformism practiced by the boys from Bury St Edmunds, it is hard to argue with the results.

The company has just agreed to buy Laurel's 432-strong neighbourhood pub business, boosting its managed estate and enabling it to increase the quality of the Pub Partners tenanted arm by stepping up its successful programme of managed house transfers.

This is the latest in a string of acquisitions and started with the Magic Pub Company in 1996 - which bought the Hungry Horse chain into an otherwise brand-free zone. Since then Beards of Sussex, Morland, Old English Inn and Morrells have been added, creating a business which, its bosses freely admit, doesn't fit the standard model.

In a market where the big national estates are moving towards long leases, Greene King likes old-fashioned, short-term tenancies because this allows it to stay closer to its licensees. It doesn't "do" brands - apart from Hungry Horse - and having avoided any significant exposure to the volatile town centre market, its managed pub arm is also doing very nicely.

With beer sales, and bitter in particular, in decline, the Bury St Edmunds brewery now accounts for one in every nine pints of cask ale sold in the UK and there's talk of adding a third shift.

Crucially, the company is sticking to the integrated-brewer-and-pub-operator business model in a market where every player bigger than Greene King and closest rival Wolverhampton & Dudley Breweries (W&DB) has severed beer production from pub ownership over the past five years.

In a landscape once dominated by the pub estates of national brewers such as Bass, Scottish & Newcastle, and Whitbread, the operations of "super-regional brewers" Greene King and W&DB might seem a concept consigned to the past - if only they weren't proving so annoyingly successful.

Meeting City analysts and the press in July, Greene King announced a 10 per cent rise in pre-tax profits to £82.6m. Tim Bridge (pictured) and finance director Michael Shallow were clearly pleased with what they described as "some very good figures".

Mr Bridge said: "The strategy has been consistent for many years and is founded upon three integrated trading divisions. Yet again all three have increased their turnover and trading profits."

The brewing side was the star performer, with turnover up by 11 per cent to £106.1m and trading profit by 21 per cent to £16.1m. The big shadow cast by the beer brands' success can make it easy to overlook the continued success of the pub estate, however, which stood 1,681 strong at the end of the year to May and will grow by more than 25 per cent to 2,100 with the Laurel deal.

In the managed Pub Company, turnover across the year rose by one per cent to £331.6m and trading profit by four per cent to £56.9m. Given that the managed estate reduced from 571 to 528 over the year as houses were transferred to tenancy, it's a performance many in the industry will envy.Plus average sales per pub increased by seven per cent.

The company remains dubious about the benefits of branding, partly because in a crowded market it becomes harder to realise the benefits, but mainly because, says Mr Bridge, "many customers, particularly in local community and neighbourhood pubs, like it to provide them with what they want from it, without having unwanted retail branding forced upon them".

In the tenanted and leased Pub Partners estate, turnover increased by three per cent to £115m and trading profit by nine per cent to £47.8m, growing to 1,153 pubs across the year through transfers from the bottom end of the managed estate. Following the Laurel deal, the company expects to transfer about 150 managed pubs to tenancies in the months ahead.

This inevitably raises the question, particularly relevant in the current heightened climate of interest in the relationship between landlord and tenant, of whether Greene King isn't simply passing on problem pubs to tenants.

"Not at all," insists Mr Bridge. "The maths are different between a managed house and a tenancy. You haven't got the central costs - the main overhead for a tenanted couple is themselves. When we transfer a pub between divisions, it's because we believe it will perform better as a tenancy."

Nor are the tenants left to their own devices. Greene King favours the short-term tenancy agreement, which it sees as "a better fit for the steady, dependable, local community pub".

Currently 897 - 78 per cent - of the Pub Partners business is tenanted, and the proportion is expected to increase as the company gradually regains possession of leases inherited through acquisition. "There are obvious benefits with tenancies, such as control over aspects like signage, but more importantly, you are more closely in touch with the tenants and what's happening in the business."

So the pubs have proved a success story, and one which seems set to grow. While the smart money backed W&DB, Greene King leisurely trotted up on the inside to snap up the Laurel community estate.

The deal is being financed from bank borrowing, with no plans to issue new equity. Michael Shallow says he would be comfortable with gearing of 100 per cent, a level others would envy. So are there any more acquisitions to come?

"We've been through a fairly intense period of consolidation in the sector and fully expect that trend to continue," says Mr Shallow. "We're not in a race with anyone, but we've always said that if the right opportunity comes along, we'll take it."

Laurel stats

Turnover from Laurel neighbourhood pubs (for the 52 weeks to Feb 29): £235.4mGeographic spread of the pubs: