Breare orders

Robert Breare is carving a new role for himself, two months after leaving the Arcadian hotel chain he founded. One of the hotel industry's deal-makers of the 1990s, Breare is now a modern-day alchemist.

As chief executive of regional brewerUshers of Trowbridge, Breare now works for venture capitalist Alchemy. He aims to take the base metal which is Ushers and make it valuable enough for Alchemy to profit from a sale in two to five years' time when it exits its investment.

In fact, Breare intends to do in the pub market exactly what he has done in hotels - and prior to that in publishing. Namely, building up a company to realise its financial potential.

In his three short months in the pub industry, Breare has already established his belief in breaking tied-tenanted pubs and offering longer leases to tenants to encourage their long-term commitment. He is no fool in realising the benefit of the tenanted estate, as the company's audited accounts to 31 October 1998 show. The tenanted estate reported an operating profit before unallocated overheads of £11.7m on a turnover of £27.9m. The brewery had a turnover of £45.8m, but an operating profit of only £6.3m.

Breare is wholly committed to tenancies. "They're a reliable cash-flow with low overheads," he says.

But how has Robert Breare, in the business of hotels since 1987, found himself concerned with such things? Back in June he was working for Arcadian, the hotel chain he founded in 1990 and sold last April to Patriot American Hospitality for £92m.

"I left for two reasons," he says. "Temperamentally, I'm not a classic line manager, but for a year or so after Patriot took over I had a job with the integration of the businesses.

"I might well have stayed if Patriot had continued with what was intended as asignificant expansionary trail of at leastthree major products, of which we already had two, throughout European gateway cities," he ponders. "But Patriot got into financial difficulties."

Nor was he interested in bidding for any of Arcadian's component parts, "Absolutely not!" he says.

Breare's route to Ushers came via Jon Moulton of venture capitalist group Alchemy Partners. The two are long-term colleagues: Moulton helped fund Breare's first management buyout back in 1982 when he acquired his family's small Harrogate newspaper. Ushers is the fifth time the two have worked together.

Consequently, on 12 July Breare was appointed chief executive of Rhesus, Alchemy's buyout vehicle and the master negotiator became the slightly unlikely chief executive of Ushers of Trowbridge.

This traditional regional brewer andpub retailer made the headlines in 1991 when its management bought it from the Courage/Grand Met empires. It produced bullish reports when management floated it in late 1997, but was the target of press scorn months later following a profits warning.A chequered stock market performance saw it exit the market when its shares were bought by Alchemy Partners in December 1998.

Following its acquisition of Ushersof Trowbridge's 550 pubs, Rhesus merged them with Alehouse, the 250-outlet pub group that the parent company acquired in June 1997.

Aside from the 60 managed houses and 740 tenancies, Ushers now comprises a 600,000 barrel-capacity brewery, currently operating at 70% capacity. Two-thirds of production is contracted to third parties. The brewery occupies prime real estate in central Trowbridge which, given today's property market, may yield a healthy sum.

Breare is aware of this, but responds: "I'm positive about the brewery. It's big enough to make serious money. When it is close to capacity it is very, very profitable. It's also well capitalised. We'll run it as if it is a separate business and I'm confident about picking up more high-quality contracts."

It hasn't taken long for Breare to become familiar with the pressures and challenges that have caused boardroom grief among regional brewers: namely, declining beer volumes and healthy retail competition from a young and vigorous independentsector.

He is having to learn some lessons pretty quickly. "My job is running considerably different elements of the same business," he observes. "In a short period of time, perhaps na‹vely, I've become a devotee of a major separation between brewing and retail.

"From what I've seen so far, there is an incredible, confused mishmash in the middle of counter deals - such as how much discount do I give away for a bit of brewing here and how much brewing do I give away for a bit of discount there? Trying to understand what product makes real money on an arms' length-market basis is tough."

Tied too tightly

He says this begs the question: if you have a brewery, how tightly do you tie the retail estate to the brewery own-brands? "I'm quickly becoming an advocate of not being tied at all," he reveals.

"Clearly, you make your money from buying from suppliers and distributing to your pub estate. But I'm not sure it is sensible to make money by forcing your brands into outlets that would have a significantly higher turnover if they could stock other people's brands and give consumers what they want."

He says what also amazes him is the notion that managed houses somehow have a link with the tenanted estate. "They are two separate products, with separate management techniques. If you are going to have them both, you need to have two clearly separate divisions with separate business plans."

This is a man who most definitely believes in the free market. That aside, his primary focus is to increase the profitability of the retail estate. A securitisation of the estate (selling the long-term cash-flow to bond holders) will realise £180m by late September. Of this, £160m will go to pay existing debt and £20m will be available for immediate investment. Breare believes this is essential, as is realising the value of current assets - "there's tremendous organic growth capability," he says.

Perhaps the biggest change will be a new business partnership offered to tenants. Breare envisages this involving a freeing of the tie on all wet products - and perhaps other commercial advantages such as the quasi partnership-style agreement as is seen with the long-lease companies - in return for increased rent and attracting and keeping quality tenants.

Although nine-tenths of the estate will always be tenanted, he views a managed estate of 100 to be the minimum size to support the administrative and control apparatus needed to earn serious money.

Breare knows enough about his new industry to realise that acquisition, both in managed and tenanted estates, will be painstaking and expensive - anything half-way sizeable and decent was snapped up long ago.

Large-scale acquisition will be funded by renewed equity investment, as would have been the case if Ushers had been successful in its bid earlier this year to acquire pub chain Inn Business.

He admits that "the managed house division has been starved of capital and management time", and he keeps an open view on future strategy. Theming isn't an obvious solution for Breare: "Death to me is a bad theme."

Ushers will decide by November whether to introduce a new theme in its managed estate, restricted to certain town centre outlets, or to "go for total individuality, increase standards overall and perhaps have a slightly themed food branding".

"Hall & Woodhouse [the Dorset-based brewery and pub retailer] has that and it has a hugely successful managed division," he says.

The budget hotel market should also beware, as Breare is an enthusiast of moving Ushers into the budget accommodation market with rooms costing about £40. "But budget with character, not the anodyne, antiseptic rooms that are mostly on offer. It'll work incredibly well when allied to a managed house."

Big plans, but how long will Breare stay in pubs when it is clear Alchemy needs to realise its investment in the next few years? Could this be a stopgap?

"Not at all," he insists. "What turns me on is running a substantial business, with substantial upside. Ushers is that. There's lots to do - and we've an equity partner behind us who is prepared to deliver.It is an exciting cocktail and I'm loving it."

"Upside" is Breare's euphemism for "room for improvement", and that is certainly true for Ushers. The industry will watch Breare's performance with interest - all pub chiefs are home-grown - to see what this open-minded internationalist will achieve. What's more, will he mould Ushers for a flotation or a sale?

Breare believes the structural change in the public market and its disinterest in smaller companies mitigates against a return to the stock market. "I don't see AIM as being an interesting step. I'd go from private to the main market. However, the threshold has risen and I see £300m-£500m as being basic size for any liquidity in shares."

So the industry may presume his aim - and Breare doesn't demur - is to build the company and make it attractive enough for sale to Nomura or Enterprise Inns, Wolverhampton & Dudley Breweries or Greene King.

With the pub industry's penchant for consolidation - and plenty of international money sloshing around to fund British pub acquisitions, as Punch and Nomura demonstrate - this appears feasible. Whether the brewery will form part of the sale will be another question. n