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The City

Published:  18 January, 2007

Consumer spending is slowing down, but you would not know that from the recent results from some pub companies. For instance, Wolverhampton & Dudley and Mitchells & Butlers have both produced buoyant profits based on solid sales returns. Enterprise Inns, Britain's biggest pub group, announced interim profits ahead by 56% on turnover 89% up following the purchase of the Unique Pub Co for 2.2 billion last year. The average profit per pub rose by 9%.

With the Enterprise results, chief executive Ted Tuppen said that there was little left he wanted to buy and the company was turning to organic growth and improvement of the existing estate to drive its future profitability.

But that does not mean that interest in pubs and breweries is diminishing. In the past 12 months, Wolverhampton & Dudley has bought Wizard Inns and Burtonwood Brewery. Now it is taking over Jennings Brothers, the Cumbrian group. The economies of scale are obvious, especially in the supply of community pubs (which are enjoying burgeoning profitability) rather than city centre outlets (which are feeling the draught). And size also pays off in terms of meeting the terms of ever more complex legislation.

Meanwhile, property tycoon Robert Tchenguiz is buying up pub groups with almost indecent haste. Last year he bought Laurel Pub Co, which owns the Hog's Head brand, for 151 million. Ten days ago he paid 202 million for Yates, the former wine lodge group, only a year after it was taken over by a venture capital company for just 151 million. Aside from being part of a consortium bidding for Somerfield, Tchenguiz is also closing on Spirit Group for a 250 million package of pubs and is bidding for the SFI Group, which owns the Slug & Lettuce brand. In all, he is reported as saying that he wants to build an empire of 1,000 managed pubs.

The rate at which companies are being swallowed leads some commentators to believe that very soon there will be few of any quality left to grab. Take Wolverhampton & Dudley, which has built an empire of more than 2,000 pubs by acquiring companies that brew their own beer and largely supply their own pub estates. Obvious targets are few and far between, especially because the sector is now populated by fiercely independent family groups such as Shepherd Neame, Fuller's, Smith & Turner and Young & Co.

The price of Young's shares has doubled to about 18 in the past year alone, largely because of the value of its Wandsworth Brewery site and the prospect that the company may relocate. In addition, the company's complex share structure is being unified and moved to the Alternative Investment Market because of the inheritance tax advantages entailed. The move could make Young's vulnerable to a takeover, but the family will remain controlling shareholders, while the stock price will be a deterrent to a predator.