Punch drunk in early rounds

Bri­tish pub busi­ness looks slow for now

Finweek English Edition - - Companies & Markets - MARC HASENFUSS march@fin­week.co.za

WHEN IN­VEST­MENT COM­PANY Halo­gen dis­posed of its Zim­bab­wean gold min­ing as­sets early in 2007, direc­tors stressed the main in­vest­ment cri­te­ria in the fu­ture would be to find “a well-es­tab­lished, prof­itable, cash gen­er­a­tive Bri­tish busi­ness with a com­pe­tent man­age­ment team in place”.

At this point you could say with cer­tainty that Halo­gen at least de­liv­ered on one of those cri­te­ria: it found a Bri­tish busi­ness in the form of Heart­stone Inns, a fledg­ling English pub chain. How­ever, Heart­stone is nei­ther well es­tab­lished, prof­itable nor cash gen­er­a­tive. Whether man­age­ment – headed by Stu­art Hawthorn and James Birch – is com­pe­tent will de­pend on how well Heart­stone can trade ro­bustly through what hasn’t ex­actly looked like a balmy English sum­mer.

Halo­gen’s in­terim re­sults to end-March – now de­void of ex­tra­or­di­nary prof­its made on sell­ing gold in­ter­ests – look ter­ri­bly un­der the weather. The £3m in­vested in Heart­stone has now been writ­ten down to £2,8m, which is un­der­stand­able, since Halo­gen’s share of the pub busi­ness was a £160 000 loss. That’s not a great start by Heart­stone – es­pe­cially since the cost of Halo­gen main­tain­ing its Lux­em­bourg list­ing is stack­ing up. Pro­fes­sional costs as­so­ci­ated with the list­ing al­ready top £100 000.

In a let­ter to share­hold­ers, chair­man David Mar­shall said Halo­gen had taken pro­fes­sional ad­vice on how to re­struc­ture the group to mit­i­gate com­pli­ance costs. One pro­posal is to can­cel the group’s list­ing in Harare. But, more in­ter­est­ingly, Mar­shall noted: “We will con­tinue to in­ves­ti­gate op­por­tu­ni­ties to min­imise op­er­at­ing costs for the group, which might in­volve changes to the domi­cile of the group and fur­ther changes to the ar­range­ments for trad­ing Halo­gen shares.” Could that mean an end to its JSE list­ing?

As re­gards op­er­a­tional mat­ters, Mar­shall said there had been a slow­down in the rate at which Heart­stone was man­ag­ing to ac­quire ad­di­tional pubs. He said there was a scarcity of suit­able pubs com­ing on to the mar­ket, which con­trasts a state­ment made in May last year when share­hold­ers were told “Heart­stone has a strong pipe­line of po­ten­tial fu­ture ac­qui­si­tions”. Mar­shall ad­mit­ted that if the trend con­tin­ued “it will push back the date at which Heart­stone will be­come con­sis­tently prof­itable”.

Cur­rently, Heart­stone op­er­ates four rural pubs – The Crick­eter, The Butch­ers Arms, the Dig­gers Rest and the re­cently ac­quired Hare & Hounds in Devon (which has dou­bled the group’s turnover). An ex­tract from a trad­ing state­ment from Heart­stone doesn’t make cheer­ful read­ing: “Since the be­gin­ning of 2008 we have started to feel the im­pact of con­sumers rein­ing in their spend­ing. At this stage it’s dif­fi­cult to quan­tify the im­pact of the broader eco­nomic sit­u­a­tion, be­yond say­ing that we’re cer­tainly ex­pe­ri­enc­ing a slow­down.”

Mat­ters haven’t been helped by the smok­ing ban in Eng­land, which re­port­edly has ad­versely im­pacted pub foot­falls and sales. Heart­stone says April trad­ing was poor (eco­nomic gloom, cou­pled with hol­i­days and poor weather) but saw a strong re­cov­ery in sales.

It would seem a lot is rid­ing on the last few months of the English sum­mer. But it seems rea­son­able to ex­pect Halo­gen may have to pour in fur­ther cap­i­tal be­fore Heart­stone turns on the cash flow taps. For­tu­nately, just more than 500 000 of 620 000 war­rants to sub­scribe for shares in Halo­gen were ex­er­cised, rais­ing around £500 000 ( R7,7m) in new cap­i­tal.

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