The Laurel Pub Company Limited

2001–2005

The U.K. pub industry underwent a rapid consolidation at the turn of the century, resulting in the creation of a small number of pub powerhouses, including Enterprise Inns, Punch Taverns, and others. Laurel attempted to join the race for scale with an interest in acquiring Mitchells & Butlers, the pubs group formed by the breakup of Six Continents (formerly Bass). The company renounced the attempt, however, balking at the £3 billion purchase price.

The consolidation of the industry took on new momentum in 2003, with the announcement by Scottish & Newcastle of its intention to sell off nearly 1,500 pubs. Laurel joined in the bidding war, teaming up with Japan's Nomura. Yet that pairing's bid failed to make the S&N shortlist. Instead, Laurel joined with investment group Cinven at the end of September to make a new offer. By the beginning of October, though, Laurel appeared to have once again lost out in the bid.

Laurel's failure to gain control of the S&N estate was seen as a signal that Laurel itself would become vulnerable to a takeover offer--the success of the S&N bid would have enabled Laurel to go public soon after, and allow the company's parent to cash out on its investment. With prospects of a public offering dimmed, observers now suggested that Morgan Grenfell would seek a return on its investment through an outright sale of Laurel. In the meantime, Laurel remained a valuable asset for its German parent, with sales topping £350 million and generating profits of £70 million in 2002.

The Laurel Pub Company Limited is one of the United Kingdom's top five operators of managed--as opposed to tenanted--pubs, with more than 650 pubs throughout the country under its control. Created in 2001 from the sale of former brewer Whitbread Plc's pub estate to German investment bank Morgan Grenfell Private Equity (which remains Laurel's owner), Laurel Pub is seeking a place among the survivors of the rapidly consolidating U.K. pub market. Yet the company's hopes for a place in the top three were dashed when it was dropped from the bidding for the more than 1,500-pub estate of Scottish & Newcastle Plc in October 2003. The failure to gain scale may make Laurel itself a vulnerable takeover target, if parent Morgan Grenfell seeks an early return on its investment. In the meantime, Laurel has been streamlining and redeveloping its own estate. In December 2002, the company sold nearly half of its pub estate in a sale-leaseback arrangement with London & Regional Properties, which freed up nearly £300 million for Laurel's investment and expansion effort. Laurel's pubs operate under five primary brands and formats: Hog's Head, Wayside, Champion, Town Traditional, and Tavern Venue. The company, led by former Bass executive Ian Payne, plans a public offering by 2005--if it avoids being swallowed by a larger rival.

Whitbread Pub Origins in the 19th Century

One of the most famous names in British brewing history, Whitbread--from which the Laurel Pub company was formed--traces its roots to the mid-18th century, when former brewing apprentice Samuel Whitbread acquired his own brewery in London in 1742. Whitbread's stout and porter appealed to London taste buds, and by the 1760s, the company owned two breweries and had become the second largest brewer in the city.

In the meantime, Laurel remained a valuable asset for its German parent, with sales topping £350 million and generating profits of £70 million in 2002.

1868–1971

For over a century and a half, Whitbread focused on its brewing operation, supplying the large number of "free houses" in the London region. These pubs remained independent of the more than 100 brewers in the area (and many were brewers themselves), and were not restricted to sales of any particular brand. The 1880s, however, witnessed a sudden drop in demand for beer, placing a great number of pubs in financial distress. Eager to preserve their retail outlet, the country's brewers began buying up the struggling pubs, creating the so-called "tied house" system, in which pubs featured only the beers of their brewer owners. In turn, in order to finance these acquisitions, the brewers were forced to go public. Whitbread's turn at the stock market came in 1889.

Owning pubs, while giving brewers a guaranteed retail outlet, was not always profitable. Pricing pressures, and poorly managed pubs, coupled with recurring recessions, often transformed the tied houses into financial burdens for their brewer-owners. Whitbread faced the same cyclical difficulties, such as in 1900, when, as the result of attempts to boost profits by lowering prices, the company was forced to write off the property value of its tied houses. This move, however, was later credited with saving the company from financial ruin.

Beer consumption began to rise again in the early 1900s, and Whitbread's production increased accordingly. Yet on the eve of World War I, the British government imposed new and far higher license fees on the country's tied houses. Pubs once again became financial liabilities, and forced the closure and sale of many of the country's smaller breweries. In response, Whitbread stopped adding new tied houses, and instead focused its efforts on its bottled beer sales. First introduced in 1868, Whitbread's bottled beer had by then earned the company an international reputation. The successful expansion of the company's bottled beer business enabled it to reduce its reliance on sales within its tied houses.

Whitbread's pub estate stood at less than 100 through World War II. Indeed, the company's head, Francis Pelham Whitbread, who died in 1941, played a prominent role in opposing further development of the tied-house system, particularly in his position as chairman of the industry's Brewers Society.

The company's stance changed dramatically following World War II. Bombing raids had destroyed much of the company's brewery operations; however, the company's relatively strong financial position enabled it to rebuild--and embark on a modernization program in the 1950s.

Its brewing rivals had not fared as well, however, and, threatened for their survival, placed themselves under the protection of the "Whitbread Umbrella." Originally set up to enable the smaller brewers to join Whitbread's larger distribution network, the "umbrella" gradually turned into an acquisition program--between 1950 and 1971, Whitbread acquired some 26 brewers.

1989–1992

While many of these breweries were small, locally oriented affairs, a number of Whitbread's acquisitions brought the company larger regional and even national operations. The acquisition drive also enabled Whitbread to expand its network of tied houses to a national level. By the 1960s, the company's brewery acquisitions targeted more specifically those companies' pub portfolios. By the 1970s, the company operated more than 10,000 tied pubs.

A New Pub Company for the New Century

Yet the deep recession of the 1970s nearly brought Whitbread to bankruptcy. The harsh economic climate, coupled with a shift in the consumer beer market from traditional stouts, porters, and ales to lighter lagers, placed Whitbread under additional pressure. The company began to de-emphasize its reliance on brewery and pub operations during that decade, shutting down a number of breweries--including its original London-based brewery--consolidating production, and, especially, stepping up a diversification drive initially started in the 1960s.

Throughout the 1980s, Whitbread continued to redefine itself, adding a variety of entertainment, leisure, hotel, restaurant, and other operations. By the end of the decade, brewing and pub operations accounted for just a minor percentage of the company's total sales. Meanwhile, the British government's investigation of the monopolistic nature of the tied-house system led to the passage of the Beer Orders of 1989. Under this new legislation, restrictions were placed on the number of pubs brewers were allowed to own. In Whitbread's case, it meant that the company would be forced to sell off, or lease out, nearly 2,300 pubs by 1992.

The Beer Orders created an entirely new industry in the United Kingdom, that of independently operating companies focused on pub ownership and/or management. Set up in large part through the raising of venture capital, the new companies, which included such names as Enterprise Inns, Punch Taverns, JD Wetherspoon, Luminar, and others, began vying for the pub estates of the country's brewery groups.

In 1990, Whitbread formed a new subsidiary, the Whitbread Beer Company, to take over its brewing, distribution, and marketing operations, as the company began withdrawing from much of its regional brewing assets. A second subsidiary, Whitbread Inns, was created to hold the 1,600 managed pubs the company intended to keep after complying with the Beer Orders. That process was completed within the government's deadline by the end of 1992.

1997–2001

Whitbread's transition into a restaurant, hotel, and leisure group continued through the 1990s, as the company continued to sell off pieces of its pub empire. In 1997, the company narrowed its pub focus, selling off houses that sold beer from other brewers. The company continued shifting its portfolio the following year, when it shed some 250 traditional-styled pubs. Nonetheless, the company had also continued to add new pubs, and by the late 1990s held some 3,000 managed and tenanted pubs. The latter represented more than two-thirds of the group's total pub portfolio.

In 1999, Whitbread made a last attempt to return to the top of the U.K. pub industry. In that year, the company reached an agreement, worth more than £2.8 billion, to acquire rival Allied Domecq's portfolio of more than 3,500 pubs, a move that would have required Whitbread to dispose of its brewery operation in compliance with the Beer Orders. Yet that deal was struck down by the country's Mergers and Monopolies Commission.

The failure to see the deal through led to the final phase in Whitbread's transition away from its roots in the brewing industry. In 2000, the company sold off the entirety of its brewing business to Belgium's Interbrew. The following year, the company put its fold of more than 3,000 pubs up for sale. In May 2001, Germany's Morgan Grenfell Private Equity, a unit of Deutsche Bank, agreed to pay more than £1.6 billion for the Whitbread estate.

Morgan Grenfell then set up a new company, the Laurel Pub Company, to operate its U.K. pub operation, placing former Bass executive Ian Payne in charge as CEO. Payne promptly moved to focus Laurel on the managed pub side, selling off the group's 2,300 tenanted pubs, including a package of nearly 1,900 pubs to tenanted pub specialist Enterprise Inns for nearly £900 million.

Laurel next began an investment program, installing a new state-of-the art EPOS (electronic point-of-sale) system across its entire 625-strong managed pub estate, at a cost of £15 million. The company also spent some £21 million refurbishing its pubs. Helping to fund this effort was the sale-leaseback agreement signed with real estate group London & Regional