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The two companies differ on the type of public houses they own. There are basically two types of pub in the UK. The traditional "local", otherwise referred to as a "community" pub within the industry, and the new breed of "destination" pub. Housed in a converted bank, post office or cinema, the destination pub has more of an affluent ambience to that of the typically old-fashioned community watering hole. Enterprise Inns concentrates on the community pubs, while Wetherspoon focus their attentions on High Street destination outlets.
Gobbling up the unwanted community pubs of yesteryear has been Enterprise Inns. After making six substantial acquisitions since 1996, including the purchase of 217 pubs from Bass (LSE: BASS) for £70m last June, Enterprise announced today its biggest acquisition to date. The group is now planning to buy 183 pubs from Whitbread for £115m, an estate surplus to requirements after the brewers' purchase of Swallow Hotels last year.
Move on to Wetherspoon, a company that has grown purely organically, and contrast the difference in performance. Established pubs in the company's third quarter achieved like-for-like sales of 10%, bringing the year-to-date figure for Wetherspoon to 14%. With the company riding the wave of increasing acceptance and preference towards its High Street outlets, total sales for the three months ended 30th April 2000 rose 33% to £95.5m. Total sales for the year to date are running 40% ahead at £270m. Surely a pub is just a pub?
But the real difference is their attitude to growth. And this is due to the gradual shift away from community pubs to the new style destination outlets. According to figures from Whitbread (LSE: WTB), total revenues from community pubs are likely to shrink by 3% over the next five years, while revenues from destination pubs are likely to grow 4% over the same period. With the large brewing firms turning their attentions to this growing drinking market, they've been offloading their steadily declining pubs.
Enterprise consolidates
Enterprise's interim figures make for impressive headline reading. The six months to 31st March 2000 saw turnover soar 54% to £75.3m, operating profit leap 58% to £33.5m and earnings per share (EPS) jump 37% to 19p. But don't get too excited. All the growth was down to acquisitions. Down in the detail, Enterprise describes its Christmas and Millennium trading as "lacklustre" and the company suffered a volume decline over the period. Commendably, operating profits per pub rose 7% in the reported six months, although Enterprise can only go so far in cutting costs and increasing its charges.
But to me, Enterprise's growth-by-chunky-acquisition strategy within a declining sub-sector does not inspire. Enterprise are effectively consolidating a slowly dying type of pub, a strategy that is not enticing for a long-term investor. For the growth to effectively continue, Enterprise is going to need ever bigger and ever more expensive deals to continue its record. The danger is that further purchases either do not materialise or become too expensive. Enterprise's poor formula for growth, with its shares at 367.5p and standing on a forward price-to-earnings ratio of under 9, is amply recognised by the stock market.
Organic Wetherspoons
With plenty of available sites in town centres to be had from disappearing bank branches, there appears no stopping the Wetherspoon rapid pub rollout. At 397p, Wetherspoon shares are perched on a multiple of 24 times this year's expected earnings.
Regardless of the fact that both companies operate pubs, the stark valuation difference confirms that the stock market will always pay more for organic growth in an increasing market than a company busy consolidating while swimming against an industry tide.
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