Ultimate investment strategy
Unbroken years of success at Ultimate Leisure came to an end this year and, in a shareholder revolt, Mark Jones, former chief executive of Yates, became its new boss. The PMA Team met him
Bob Senior, the man who ran Ultimate for more than a decade until August, must be feeling a little unlucky. After all, the nightclub market has seen more than its fair share of failed companies in recent years.
The list of companies run aground, holed below the waterline by excessive rents and poor trading, includes Po Na Na, Springwood, First Leisure and Bakersfield. Senior's Ultimate seemed immune from the cold winds of fierce competition thanks to a stringent investment policy and bulletproof balance sheet. All leasehold investments had to pay back within a year and freeholds within four. With gearing at just 12% and a predominantly freehold estate, Senior believed Ultimate could dominate its markets thanks to outstanding site selection and the fire power to out-invest the competition as and when needed.
In the five years since Ultimate launched on AIM, Senior had delivered double-digit earnings growth per annum. This year, the story began to unravel. Trading grew tougher across the piece and there were two profit warnings. It was the sort of setback that Senior, in normal circumstances, should have survived given Ultimate's unblemished track record. But the decider in terms of Senior's future was a move by chairman Allan Rankin and his two brothers to sell large portions of their 30% stake in the company.
Shareholder anger at Rankins
Other shareholders were angry in the extreme when it emerged that Stephen and John Rankin had sold stock weeks before the April profit warning. Although all shares sales were approved by the non-executive directors, it looked like the Rankin brothers were bailing out of Ultimate at a point in time that maximised their share values. Activist investor Dawnay Day soon emerged as Ultimate's largest single shareholder - and it was clear that it wanted to ditch Senior and his ultra-safe investment policy.
Dawnay Day made a sizeable profit out of its stake in Yates during its latter months as a public company, so it was no surprise when Mark Jones, the man who had delivered a good profit to shareholders when Yates went private, was chosen by Dawnay Day and other shareholders to replace Senior. Jones, who has now been at the Ultimate helm for eight weeks, has already drawn up an investment strategy that is positively swash-buckling by comparison with the Senior days. He does, however, acknowledge that his inheritance from Senior and his management team is a solid trading platform.
'You can't be churlish - these guys built up a very good business over a number of years,' says Jones. It is already clear, though, that he plans to grow by acquisition. Inventive Leisure is one possible target, the way made clearer by the decision by Jones and Colin Rowlinson - who worked together at Yates and now Ultimate - to sell their 3.5% stake in the business for 157.5p a share. The move, netting a tidy £600,000 profit, can only be seen as a clearing of the decks to allow Ultimate to pursue Inventive, which is already subject to go-private interest from Alchemy Partners. It is likely that the Inventive share price will push higher. But Jones and Rowlinson were in danger of a conflict of interest if they retained their stake.
Not surprisingly, Jones will not be drawn on a possible Inventive bid. 'We're actively looking at a number of things,' is all he will say in relation to Inventive. But buying a high quality premium bar business like Inventive fits ideally with the strategy that Jones has drawn up. He believes that Ultimate, currently running 31 sites, needs to move away from its nightclub predominance, not least because the new licensing era threatens more damage for the sector as suburban pubs open later.
Building a broader business
'We're not just going to acquire nightclubs,' he says. 'I like the idea of making Ultimate a more broadly-based business. Obviously, Ultimate's competencies and skill-set is in the late-night market and nightclubs, but I like the idea of operating premium bars as well as nightclubs.
'Another reason you don't want to bet your house on just being a nightclub business is that the longer term prospects for nightclubs are pretty tough. You have other operators such as pubs nipping away (at business) with longer hours and you have the police trying to close clubs that are caught serving underage drinkers twice in some towns. It's going to a tough market so I think Ultimate has to be broader-based to cover all the bases.'
One happy legacy of the Senior days at Ultimate is extremely low gearing. With assets worth £65m and just £12m of debt, Ultimate has an immediate £50m of acquisition fire power with the additional ability to borrow against the value of target companies. Rowlinson, who is now Ultimate's business development director, is rumoured to be working full-time on reviewing possible single-site and company acquisitions. Jones insists that a public company like Ultimate should be able to take part in the high-street consolidation process that is attracting so much private-equity money.
'I think there are opportunities for public-company shareholders to benefit from some of the consolidation. It's probably going to be more difficult for us than some of the private-equity guys, but that doesn't mean we shouldn't try.'
He insists Dawnay Day is not likely to be a cut-and-run investor in Ultimate. Last week, KC Wong became Dawnay Day's non-executive representative on the board. 'Our shareholders see my job as restoring value to the business. Dawnay Day has sent out a message with this appointment that they are long-term holders of the stock - it had a large investment in Austin Reed for over three years.'
Investment in existing sites
The new Jones strategy for Ultimate will see investment in existing sites in the coming year rise to £5m from the previously budgeted £3m. Between £50,000 and £500,000 will be spent on 15 of Ultimate's 30 or so venues. Four leasehold bar sites will be sold. The property pipeline is being cranked up, so five branded sites from its Coyote Wild, Chase and Blubambu stable will open each year from 2006 onwards.
Jones believes Ultimate had begun to miss the re-investment cycles needed to keep trendy bars fresh. 'The company has a very low capital expenditure budget for this year: it was £3m, of which £1.5m was going on a new Blubambu in Derby. I think the business would have continued going backwards if we hadn't stepped in. In virtually any bar business, as soon as you start taking the foot off the pedal in investment terms, the business starts to go backwards. You have to come up with an economic model that allows you to continue to invest every two or three years.'
Ultimate results:
Turnover was up 2% to £36.4m with profit before tax down 6% to £8.4m for the year to 30 June 2005. There was an impairment charge of £8.5m.
Mark Jones on:
What went wrong at Ultimate:
'I think there was a general downturn in sales, but, specifically, there were a large number of sites they just hadn't invested in. With new entrants coming into markets, we had dark and dingy outlets as competitors were coming in with light and airy stuff.'
Ultimate's operational weaknesses
Mark Jones has produced a list of eight areas of operational weakness at Ultimate. Included in the list are: customer service standards, operational controls, product portfolio, pricing strategy and the managers' bonus scheme.
He believes, like Bob Ivell when he arrived at Regent, that Ultimate venues need to sell more branded premium products. 'Smirnoff Ice is on sale, for example, but it is hidden away with an emphasis, instead, on unbranded premium-packaged spirits.' Site managers are not 'very financially literate' he has found. 'They've not had site profit and loss accounts in the past.
It's not their