Getting out of brewing is the correct decision for Fuller’s
Pub operator Fuller, Smith & Turner (FSTA) is in an interesting position strategically as it will soon have a large amount of cash to help expand its estate of pubs and accommodation.
The £250m disposal of its beer business to Japan’s Asahi will leave it focused on properties to sell beer, rather than making and distributing it.
While culturally it may seem odd as the Fuller’s brand has been synonymous with brewing for years, it actually removes a big distraction for management.
Brewing has become an ultra-competitive industry with global brewers benefiting from material economies of scale. The fast-growth trend for craft beer has also seen significant numbers of brewery start-ups. Poor old Fuller’s has been stuck in the middle, leaving it struggling to add value.
Fortunately it has a much stronger position in the pubs sector where it has proved capable of developing and acquiring high-quality, premium pubs and serving up punters with tasty fresh food.
The lion’s share (87%) of group operating profit is currently generated by its pubs and hotels and having a new slug of cash provides significant opportunity to go out and buy more sites.
‘We think it is just the beginning given Fuller’s is now in a position to deploy north of £150m on acquiring premium pubs in affluent locations over the coming years,’ comments Berenberg analyst Owen Shirley.
The proceeds from the brewery sale – a deal which looks incredibly generous with Asahi paying top-price to secure the assets – will also help to reduce borrowings, enhance the pension scheme and give shareholders a nice present too.
Shirley says the pub operator’s net debt/EBITDA (earnings before interest, tax, depreciation and amortisation) ratio will fall from around 3.0-times at the moment to a more comfortable 1.1-times by the end of its next financial year which runs to March 2020.
Fuller’s says shareholders should expect between 100p and 125p special dividend as their share of the disposal proceeds.
Don’t be put off by a 15% share price jump since the Asahi deal was announced. We think the shares still have a lot more to travel, particularly once management put the new cash to work.
You’ll need to be patient as the transaction isn’t expected to complete until later this year.