Beer froth expected to fly in takeover battle

Nov 19 2007 Western Mail

PDATES from two well-known high street names and the latest developments in a £7bn takeover tussle will keep investors busy this week.

Scottish & Newcastle’s trading update tomorrow will be overshadowed by the increasingly bitter pursuit of the business by European duo Carlsberg and Heineken.

The Foster’s brewer accused the pair of trying to buy the business "on the cheap" as it rejected an improved £7.3bn takeover proposal last week – a move branded "ill-informed and intransigent" by the would-be buyers.

Edinburgh-based S&N, which also makes Kronenbourg 1664 and John Smith’s, faces being broken up if the proposed takeover goes ahead.

The jewel in its crown is the Russian beer business BBH, which it owns in a joint venture with Carlsberg. The Danish brewer covets S&N’s half of the business, which grew net sales by 33% to 2.2bn euros (£1.6bn) in the first nine months of 2007, according to a recent update.

But in the UK, the company has had more difficulties after admitting its trading targets for the year looked "very challenging" after the wet July weather dampened customers’ thirst for beer and cider.

The group’s half-year profits of £191m were 5.5% ahead of last year, but fell below forecasts.

JP Morgan analyst Mike Gibbs praised BBH’s "strong momentum" but warned, "S&N has been a winner in the UK beer market but this, even with substantial cost savings delivery, has failed to generate any real margin improvement."

Mr Gibbs also sees a takeover or significant return for S&N shareholders as a strong possibility following the takeover approach.

He added, "We are not sure if the return to the status quo here is an option any more."

Low-cost airline EasyJet will reveal a full-year profits improvement of around 50% tomorrow on Tuesday, despite pressure from sky-high fuel costs, increased competition and the doubling of UK air passenger duty.

The carrier has benefited from strong progress on operating costs, with the second-half figure – excluding fuel – set to be 10% lower than a year earlier. That offset a fall in total revenues per seat of 6.8%, which was in line with guidance after it pledged to offer Europe’s lowest fares.

With EasyJet guiding the City towards the top end of its previous profits estimates, analysts are looking for a figure of around £195m tomorrow, up from an equivalent return of £129m last year.

Attention will be on guidance for the current financial year, particularly as jet kerosene spot prices have continued to rise.

Analyst Tony Shephard of Charles Stanley stockbrokers said trends should remain positive overall.

He added, "Going into the winter, pricing pressure may continue, but year-on-year pricing comparatives are getting easier.

"Furthermore, the unit cost reductions seen in the second half should help offset pricing pressure in the first half and a new baggage charge from October 1 could improve revenues by about £35m next year."

EasyJet recently bolstered its network with a £103.5m deal to buy GB Airways, a franchise partner of British Airways.

GB is primarily a Gatwick- based operator, covering destinations across southern Europe and northern Africa with a fleet of 15 Airbus aircraft.

Investors in babycare retailer Mothercare will be looking for an update on the progress of the company’s £85m takeover of the Early Learning Centre when the company posts interim figures on Thursday.

But the deal, which brings together two of the high street’s biggest names, is likely to cloud the results for the six months to September 30, as the ELC makes the lion’s share of its profits between October and December.

Dresdner Kleinwort analyst Sanjay Vidyarthi predicts Mothercare’s operating profits will be 6% ahead at £11.2m, offset by a £3.5m loss from the ELC.

He said, "We do not expect a current trading update with the interims and would be surprised to see a material change to numbers ahead of Christmas.

"Of more importance to us will be any further insight management can give us on the ELC integration/synergies and store portfolio rationalisation."

Mothercare plans to open ELC outlets in more than 70 of its stores, capitalising on ELC’s larger toy presence to offer customers a broader range of products.

In a positive October update, the company enjoyed strong second quarter sales, with overall like-for-likes ahead 2.5% over the six months to October 13.

The firm has also seen fast growth from its Direct in Home online operation and its international business, which has more than 350 overseas outlets and operations in 45 countries.

Enterprise Inns is expected to unveil a 5% fall in profits in full-year figures tomorrow on Tuesday following the impact of the smoking ban and the poor summer weather.

Analysts are looking for pre-tax profits of around £300m in the year to September 30 from the Solihull-based business, which is the UK’s second largest pubs group with more than 7,000 pubs.

After an initial "honeymoon" period of the ban, with new customers venturing into pubs – reflected in a reasonably encouraging trading update in September – investors will be looking for indications on the current state of trading as winter approaches.

Blue Oar analyst Mark Brumby said, "November and the first frosts of the winter may test the resolve of customers, particularly its smokers.

"Add to that the possibility that the consumer is slowing and trading may be about to get somewhat more challenging."

Another feature of results is likely to be any update on the group’s potential plans to take on tax-efficient real estate investment trust status and unlock cash for shareholders.

The recent credit crunch prompted it to postpone plans to raise £750m of additional debt by the end of 2007, although the group has continued with its share buy-back programme.

Car parts and bicycle retailer Halfords is well set for strong first-half results on Thursday, after a bullish trading update at the beginning of October.

The retailer, which sells one in three bikes in the UK, enjoyed like-for-like sales growth of 5.5% in the six months to September 28, at the top end of market expectations.

Halfords is one of the UK’s biggest non-food retailers with 433 stores – and one of the better bets amid more challenging times for the retail sector, according to Charles Stanley analyst Sam Hart.

Mr Hart, who predicts pre-tax profits 8% higher at £47m for the company based in Redditch, Worcestershire, said, "Halfords is among the most defensive UK retailers, given its exposure to the non-discretionary car maintenance market and a relatively low transaction value of around £21."

Halfords also looks hard-done by with a 15% fall in its share price since July as demand for its revamped Apollo and Carrera bicycles and in-car equipment such as SatNavs and MP3 players continues to buoy the group, Mr Hart said.

The firm may also choose to update on its three trial stores in the Czech Republic, and signal intentions over further expansion plans in Eastern Europe.