Pubs 'n' Bars hopes for best from stock market

It's not much fun being a small pub company on the stock exchange.

While the bottom may have fallen out of the internet boom, few investors have thrown themselves back into bricks and mortar. And it appears that size does matter and that the 1970s adage that "small is beautiful" has been long forgotten.

The unrelenting disregard for the pub and beer industry is frustrating enough for the likes of Whitbread and Scottish & Newcastle, so it must be more so for companies with a small market capitalisation such as Pubs 'n' Bars.

This month, it revealed that its pre-tax profits were up nearly fourfold because of acquisitions over the past two years. The jump to £1.005m in 2000 helped to revive a share price that has halved over the past 12 months to 30p. But last week's level of 44p was still well below the all-time high of 75p in mid-November a year-and-a-half ago.

Chairman Mike Mealey admitted there had been times when they had questioned whether it was worthwhile gaining a listing on the alternative investment market (AIM) nearly three years ago.

"The cost of having a listing is not worth it if you can't use it to raise capital," he said. "We currently have capital to operate more pubs under existing arrangement but, if we are going forward, we will need to raise more cash.

"After the popularity of internet and high-tech stocks, there's a sense that people are returning to something a little bit more secure."

But, as managing director Mel Belligero confirms, the shareholders and directors are not about to give up yet."As time goes on, it gets increasingly frustrating," he said. "Others have got to a point where they don't see any point in being listed at all, but we have got to give it a fair run."

Since arriving on the shares market, Pubs 'n' Bars has used its funds carefully to buy free-of-tie outlets across the South and the South West.

It was formed in 1998 in a reverse takeover of London Pacific Group, formerly a provider of sheltered accommodation that already had a listing on AIM. At the same time, it took over Real Leisure, the London-based operator of 27 tenanted pubs.

Real Leisure had been built up by Seamus Murphy, who opened his first pub, the Wheatsheaf in Tooting, South London, in 1988.

Seamus is still involved, as non-executive deputy chairman with a significant stake, looking after acquisitions. The company also remains in Real Leisure's former headquarters in Balham, South London, while Mike Mealey's involvement dates back to 1994. Finance director Keith Chapman was a senior partner with Real Leisure's accountants.

Pubs 'n' Bars went on to swallow Kent-based Acorn Inns, which owned 14 pubs, before moving on to smaller packages, such as the three-strong Welsh-based Quality Quest and the Somerset-based Celebration Inns.

Its 68-strong estate is predominantly made up of community locals in London and the South East, but the more recent deals have taken it into the South West, where it mainly operates rural destination pubs.

Only four of its outlets have been directly hit by the foot-and-mouth crisis, such as one in Honiton, Devon. This was viewed as a promising sign by the City after gloomy statements from rural pub owners Jennings Brothers and Old English Inns.

Mike said that Pubs 'n' Bars was considering protecting itself against poor weather next year by using a "hedging" product, which has been used by pub operator Massive and Corney & Barrow Wine Bars.

Hedging works by pairing pub operators with another company, such as an electricity supplier, which benefit over the summer if the weather turns cold. Their extra profits help to balance out the pubs' losses.

Pubs 'n' Bars' expansion led to a tripling in turnover to £12.87m in 2000, boosted by cautious investment in food, accommodation, satellite TV and other facilities.

It spent about £1m on refurbishments last year, which included developments to increase the number of budget letting rooms above its pubs. These are targeted at builders and other contract workers, who stay in the pubs in the evenings to drink and eat.

Where appropriate, cooking facilities have been installed, driving up food sales to £30,000 per week from virtually nothing two years ago. Other initiatives aimed at attracting customers include installation of machines for topping up pay-as-you-go mobile phones and bank cash dispensers.

Although the company predominantly runs community locals, it has begun to gain late licences for specific outlets such as the Devonshire Arms in Camden, North London, which is open until 2am at weekends.

Mike said: "We're benefiting from the late licences, especially since most of the costs of application and works were incurred last year.

"It confirms our belief that any changes in the current licensing laws to extend opening hours will have an immediate beneficial impact on most of the estate."

While the group owns 21 tenanted pubs, Mike believes growth is being driven by its franchise system, which is the basis of agreements in about three-quarters of its estate. This involves managers keeping an agreed percentage of their outlet's turnover, out of which they pay themselves and meet their pub's running expenses, including staff wages.

"It's attracting more entrepreneurial people who like the greater earning power," Mike said. "It appeals to people who don't have the cash up front but still want to run their own business."

After spending £4.8m on acquisitions last year, Pubs 'n' Bars continues its piecemeal expansion. Last month, it spent £740,000 on three pubs, which took it into Cardiff and Bristol for the first time and as far north as King's Heath, south Birmingham.

The estate is on course to pass the 100-mark, ideally integrating a package of 20 or 30 pubs. However, Mike said it would not relax its criteria of only buying freehold or free-of-tie pubs.

It is likely to wait for the fall-out from the current wave of big disposals by Whitbread, Scottish & Newcastle and Bass, as the buyers sift through their newly acquired estates to sell on the kinds of smaller community locals that Pubs 'n' Bars thrives on.

With like-for-like sales up by five per cent since the beginning of this year, the company has proven that its strategy is working. Like other pub groups, all Pubs 'n' Bars needs now is for more people to trade in its shares.