Flashing Amber gets ready to go

The recent purchase of S&N’s managed estate has put Spirit Amber in the driving seat. Its search for synergies, however, could spell bad news for suppliers, says Joanne Hart

FOUR YEARS AGO, Spirit Group did not exist.  Today it is the largest owner of managed pubs in Britain.  The company owes its almost unprecedented rate of growth to a series of acquisitions, culminating in the £2.5 billion purchase of Scottish & Newcastle’s managed estate early last month.

Renamed Spirit Amber in the wake of that deal, the group now has 2,478 outlets under its wing and employs 46,000 people.  Its annual underlying earnings are estimated at £500 million and turnover is likely to exceed £1.5 billion.

Key brands include Mr O’s, Two for One, Tom Cobbleigh, Chef & Brewer and Premier Lodge.  The business is a force to be reckoned with and has already said it intends to focus on finding synergies in purchasing, procurement and overheads.

"Our aim is to be the lowest-cost operator," says the company’s chairman, Tony Campbell. Spirit was originally created in August 1999 when the swashbuckling entrepreneur Hugh Osmond bought Allied Domecq’s pub estate.

At the time, Spirit was known as Punch Retail and the Allied acquisition was regarded by outsiders as an example of either extreme daring or extreme folly. 

So far, the deal seems to have borne fruit. Punch Retail split in two last year when the tenanted branch of the company, Punch Taverns, floated on the London Stock Exchange.

Spirit was pondering a flotation but market conditions were weak and wobbly and management took the view that it would be better off waiting until the environment was more favourable.

The group is therefore part of the private equity sector, an area of the financial industry that used to be shrouded in mystery but has become an increasingly prominent player in British business life.

Private equity firms are funded by professional investors such as  insurance companies and pension funds. Known also as venture capitalists, private equity organisations aim to buy companies, improve their performance and sell them a few years later, generally by floating them on the stock market or finding a trade buyer.

They use complex financial engineering to help them on their way and can be extremely successful.  In Spirit Amber’s case, the private equity backers are Texas Pacific, Blackstone, CVC and Merrill Lynch Global Private Equity. Texas, Blackstone and Merrill Lynch are US-based; CVC is British.

The company has not disclosed what shareholding each of these backers has but Texas is the biggest shareholder of the quartet. In addition, Spirit Amber’s management owns a few shares and stands to make huge sums of money if and when the company is sold.

Texas Pacific knows a fair bit about the UK pub sector as it was the principal backer of the original Punch Retail business.  The European arm of the organisation alone has funds of $8 billion to invest in situations around the EU and, at any one time, it is involved in a number of potential purchases and sales.

Texas and its partners will want to drive Spirit Amber hard.  The institutions that put money into private equity firms only see a return on their investments when the companies in their portfolios are sold.

Spirit Amber has acknowledged that it may look to float on the stock market in the not too distant future but it will need to be able to present the City with sound financial credentials if it is to win support among the investing public.

Spirit Amber’s management may well have this in mind with its pronouncements on cost-cutting and the benefits of operating a large-scale organisation.  Evidence of its ambitions in this area have already emerged.

Part of the deal with Scottish & Newcastle involved Spirit Amber signing a seven-year supply contract with the group, agreeing to buy 500,000 barrels of beer a year from S&N subsidiary Scottish Courage between now and 2010.

Under the terms of this contract, Spirit Amber will be able to buy brands such as John Smith’s and Kronenbourg for £14m less than S&N charged its own pub arm.

There is also a wine supply agreement under which S&N division, Waverley, will supply wine to the brewing group’s old retail outlets for five years. Waverley and Scottish Courage have, in addition, a five-year exclusive distribution and warehousing contract with the S&N retail business.

Other suppliers find the beer contract inevitable but disturbing nonetheless.  "All consolidation deals spell trouble for the supply chain.  Spirit is almost certainly going to try and drive down prices wherever it can," comments one.

"Pricing pressure is tough enough already.  It will probably become even tougher now," says another.  Spirit’s managerial moves also signal its determination to push ahead independently.

Only four days after the S&N purchase was announced, Bob Ivell, the chairman and managing director of S&N Retail, said he would stand down once the business had settled into the Spirit Amber stable.

His role had been the subject of intense speculation in the weeks leading up to the deal and his departure paves the way for Spirit chief executive, Karen Jones to work her magic on the enlarged group.

To find a woman at the top of a large UK business is still a rarity and Karen Jones received a welter of publicity immediately following the S&N deal, most of it unwanted. Jones has been with Spirit since its inception, having joined the firm when Punch Retail began its pursuit of the Allied Domecq estate.  She was already a seasoned entrepreneur before she was lured over to Punch. 

In the 1980s, she co-founded the Café Rouge group with Roger Myers.  They went on to buy the Dome chain and renamed the enlarged group Pelican, which they listed on the Unlisted Securities Market, a junior arm of the London Stock Exchange.

Jones was managing director of that business, when it was bought by Whitbread for £133m in 1996.  Some sceptics questioned her ability to run pubs when she joined Spirit but Jones seems to have proved them wrong.

Even before the S&N acquisition, Spirit’s estate ran to over 1,100 outlets spread throughout the UK.  The business sold 124.5m pints of beer in 2002 and its average weekly take rose from £10.8m in the first three  months of its existence to £11.8m in the third quarter of this year.

Turnover to August 2003 was £556.3m, an increase of almost 7% over the year before. Underlying earnings, meanwhile, rose 13% to £140m, even as other operators found the environment increasingly challenging.

Jones sees Spirit Amber primarily as a retailer and encourages a retail approach to business throughout the pub estate.  There is an emphasis on service, a desire to make the environment attractive and inviting and a strong interest in food as well as drink.

Jones has also turned her back on the trend for brands that some of her competitors have embraced in the recent past.  "We have never set out to build brands. We set out to build concepts," she says.  What this means is that Spirit has focused on unbranded local pubs that are united by consistent formats.

Spirit won the S&N estate in a fierce battle against a rival private equity consortium, called Laurel.  Victory means that Spirit Amber has more than doubled in size and ranks fifth in the UK tenanted and managed pubs sector. Success is unlikely to be easily won.

Topline sales growth will involve making Spirit Amber’s estate that much more appealing to drinkers than rival groups.  Profit growth will involve rigorous attention to costs. Suppliers across the spectrum know only too well what that means.