High interest in enterprising inns

With investors banking on pubs once more, Mark Stretton looks at an option for start-up companies - the Enterprise Investment Scheme

As far as the stockmarket punter is concerned, anything remotely resembling a dotcom or mobile phone company crashed and burned years ago. The Old Economy is back, bricks and mortar are back, pubs are back.

Companies that are cash-positive and consistently deliver profits are reclaiming their rightful place as stockmarket darlings and this is good news for pub companies and drinks groups.

BBC business editor Jeff Randall summed up shareholder sentiment recently, saying he would rather invest in gin and tonics than clicks and mnemonics.

Shares in Enterprise Inns have more than doubled since its stock market debut, and Punch Taverns is also preparing to launch.

But there is more than one way to skin a cat. Flotations are an option for big players with large footprints, but one way start-up companies are attracting public money is through Enterprise Investment Schemes (EIS).

EISs are intended to encourage investment in ventures that carry a certain element of risk. An EIS acts as a shelter from inheritance and capital gains tax. After a number of years - usually three to five - the shareholders will be given an exit, normally through a flotation or trade sale.

The latest offering is Tomahawk Pubs, an EIS-backed venture put together by financier Johnny Jones. Johnny has a proven track record, having launched other pub companies in the same vein, most notably Maclays.

He has locked in Rupert Clevely of London-based Geronimo Inns to run the business and assembled an impressive management team that includes Nigel Banks and Miles Templeman, the former Whitbread executive.

Guidelines are strict - an EIS start-up can raise up to £16m. Businesses with clear rental income streams are not deemed risky enough, therefore tenanted pub companies and hotel ventures do not qualify.

So Tomahawk will be a managed operation of pubs based inside the M25, all of which will be freehold and free-of-tie, with a strong food offering. To all intents and purposes it will be operationally identical to the Geronimo estate. Each pub will hold about 1,500 sq ft of trading space, and each will cost around £1m. They will operate "shabby chic" sites that suit the Geronimo customer profile - "areas with wooden slatted blinds rather than net curtains".

The Tomahawk deal means that Rupert and Jo Clevely can expand their management expertise without putting up more cash. It also means they are not hit with rent rises for growing sales.

"I needed a cash-hungry individual and a company with a proven track record that was efficient, lean and meticulous," said Johnny. "I had to be sure that the pubs we had were going to be bloody well run - Geronimo fitted the bill."

Johnny first spoke to Rupert on the phone before several meetings, and then a presentation to the Geronimo board. "They asked me all the awkward questions that I would have asked had I been in their position," he said. He convinced them it was the right way for Geronimo to go.

The Clevelys' track record has seen Michelin stars awarded to six Geronimo pubs - not bad considering just 27 pubs in London are listed in the guide.

Rupert and Jo launched their business in 1995 with the Chelsea Ram. They took net sales from £2,000 a week to £22,000 inside two years. They now have 11 pubs, all of which are leased from pub companies, and last year the firm made £300,000 on sales of £5.18m. The average take across the estate is £14,000 a week.

The Tomahawk pubs have to make money before Geronimo collects any management fee. That includes covering the target shareholder dividend of three per cent. "If they exceed the profit hurdle they get a pretty good whack of the excess," said Johnny. "The logic of all this is that I needed to tie Geronimo in and make it attractive to them.

"It's the oldest thing in the world - a trade-off between risk and security."

Geronimo has taken some of the shares in Tomahawk and Johnny says he could envisage a situation where the two companies get closer. Geronimo will get first call on any shares that become available.

Effectively, Geronimo has a call option that could be likened to the recent Enterprise Inns deal which saw it take a stake in the Unique and Voyager pub groups with an option to buy at a future date. Some would argue that Geronimo is applying its "shabby chic" trading model to freeholds with a buy now, pay later option.

At the moment Tomahawk is a trading operation hoping to raise funds. It needs to find a minimum of £750,000 before it can go live and is about to embark on fund-raising roadshows. "We're not up and running yet," Johnny said. "We are aiming to raise £10m which is very ambitious. We would be happy with £7m."

Johnny believes having a proven player such as Geronimo significantly lowers the operational risks - the main risk is what happens to pub values. Trading projections are based on what Rupert and his staff deliver in existing outlets.

The financier behind Tomahawk has an interesting and varied background. After national service, Johnny read natural science at Pembroke College, Oxford, before starting his working life with ICI. He then went to work for a small concern called Dunbar Securities that would later become part of Allied Dunbar.

He broke out on his own as an independent financier where he worked on a number of pub deals before helping the late Evelyn Matthews, the former Bass executive, set-up Maclays. "Evelyn wanted to acquire his own business when he left Bass," he said. "I was his closest connection with the world of finance so we set up an EIS to buy a small pub company and brewer."

The brewing operation was soon closed. "It was always understood that the brewery would go," he said. "There was steam and creaking girders - it was very run-down. Making beer today is a labour of love not a means to profits."

Johnny says his expertise is in structuring deals and financial products. The running of the business will be left to others. "My focus has been on creating the vehicle and getting the right people aboard," he said.

He says that anyone considering setting up a business would be mad not to do so under the EIS umbrella.

"There are lots of shell-shocked investors out there who are frightened to write cheques. This offers an investment opportunity that is not subject to the volatility of the stockmarket."

In summing up, he says that even without the tax breaks, it is a compelling offer. With Geronimo Inns at the helm and Miles Templeman thrown into the mix, it is hard to disagree.