Difference between revisions of "Phipps & Co purchase of Campbell Praed & Co. Ltd in the 1950s"
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THE STORY OF A TAKE-OVER by Mike Brown
We are all aware of the continuing story of take-overs in the brewery industry. However, it is often difficult to get a glimpse of the inside story. Luckily, many of the papers relating to Phipps and the Northampton Brewery Company are preserved in the County Record Office at Wootten Hall. Research for the forthcoming book on brewing in Northants revealed the background to the Phipps’ purchase of Praeds in the 1950s. The story is interesting, not only in terms of the family links, which are touched upon in the book, but also the financial analysis which accompanied the bid and which is outlined in this article.
FINANCING THE DEAL In 1953, Phipps of Northampton began to look at their rivals, the Wellingborough firm of Campbell Praed. To finance this they transferred the credit balances on their current and deposit accounts, £534,000, into a special account. They also arranged their overdraft facility to rise to £400,000 to cover trading.
They could raise money from liquid resources through selling government securities to the value of £280,000 to add to the cash in their accounts. However, this left £100,000, which they hoped to cover by a loan from Lloyds Bank, to be repaid by higher profits over the next 2 years. Unfortunately their application to the Capital Issues Committee for the loan was turned down. The view within the company was that the Treasury “did not wish the amount of the purchase price to be in the hands of the general public for possible speculative purposes” - some things do not change!
However, problems were foreseen with the Praed irredeemable debenture stock dating from March 1897. It was suggested that there might be possible breaches of covenant, in particular with the proposed brewery closure and conversion into a mineral water factory. Phipps’ intent to brew at Wellingborough only for a very short period and then scrap the plant, was clearly influenced by the tax position. There could be a possible claim by the Trustees, especially as the stock was 15% below par at the time and a wind-up value would be based on the average of the market value of the preceding two years. The Praed securities of £62,000 could be used for part repayment. Phipps had to consider, if it had to repay the whole of the debenture stock, whether it could borrow to do so or issue new redeemable debentures.
THE TARGET The managing director of the target, David Jones, was a great nephew of the Praeds who had bought the brewery in 1878. He was a very progressive individual and his experience as a Colonel during the war resulted in a new management approach, which in June 1948 saw a 5 Year Plan being presented to the Board. This included factors which could perhaps stand for the changes throughout the industry:-
• build or rebuild 1 house per year • concentrate on larger houses - cars, children • consider managed houses and suitability of tenants • declining off-licence sales • club trade would expand “whether we like it or not” • maximum sales were probably 40,000 barrels per year, with as much bottling as possible • creation of an independent sales organisation and an advertising campaign of £1,000 • very real and ever present desirability of amalgamation.
In August 1949, the overall property of the business was revalued at £725,120, giving a surplus of £420,687, on the 1947 valuation, which was transferred to a revaluation reserve. On 29th September, 1949, the capital of the company was increased to £300,000 by the creation of 100,000 ordinary shares and 100,000 5% cumulative preference shares. This was achieved by capitalising the reserves and issuing them as a bonus to the ordinary shareholders. The ordinary shares were quoted on the stock exchange and were trading at 27s.
The Budget of 6 April, 1948, which had repealed the tax on Bonus Issue Shares, had obviously influenced the share re-organisation. The EGM of 29 September, 1949, also showed the external influences on the decision to revalue the properties since the “ultimate objective was to obtain the best compensation in the event of nationalisation”. Their valuation of the brewery side of the business was:-
- 105 freehold £607,100
- 1 leasehold £10,000
- 42 off-licences £35,795
- Brewery etc £66,752
- Total £719,647
Robinson and Riddey Ltd, local wine and spirit merchants in Sheep Street, were bought in April 1950, followed by F. G. Thompson (Tobacconist) Ltd and R. C. Allen, bottler, Leicester in 1951. They also acquired F.E. Ball & Son (F5454), described as manufacturing wine merchants of The Vineries, Buckwell End Wellingborough, which they did not close until 1951, despite having their own mineral water factory in Commercial Lane since the 1930s.
This brought meetings with the Phipps management to discuss mineral water supplies. It was debated whether to rename the mineral water in order to help sales to Phipps and the free trade. In addition to the R.C. Allen brands, Praeds also owned the name “Archer” bought pre-war.
The previous take-overs represented strengthening of the non- brewing areas which were to lead to the demise of the business. On 24 April, 1953, David Jones wrote to Phipps mentioning a “possible form of tie-up between us over mineral waters. The whole idea is still in a very embryonic stage and I have not yet mentioned it officially to my fellow directors”. He invited ECM Palmer to lunch at Wellingborough on 1st May.
At the time, sugar was coming off rationing and a battle for the soft drinks market was anticipated. Watney Combe were looking to bottle Coca Cola and Whitbread was setting up bottling of shandy. Phipps had no mineral water plant of their own and Praeds/RC Allen were already supplying them with some 38,000 dozens from their total output of 200,000. The intent was to tie their tenants and supply them from a possible new joint company. The Northants Brewers Association had been discussing the possibility of a tie on mineral waters for several years. Various sites for a new plant were considered at Wellingborough, Corby or the old West Bridge Maltings (Mannings). However, on 16th December, 1953, it was announced that Phipps had made an offer to acquire a minimum of 90% of the ordinary shares at a price of £4, excluding any dividend for the previous year end. They had been planning the bid for some time, possibly as a result of the mineral water discussions. On 14th September, the firm of Mason & Sons, chartered accountants, had suggested the nom de plume “Carter Patterson” for the analysis behind the deal.
The Mason analysis of the Praed subsidiaries was that they were not very profitable and that the parent company might not be making any profit. Nevertheless, they reported the following earnings before interest, tax and dividends:-
1947 £118,009 1948 £107,004 1949 £80,038 1950 £67,663 1951 £65,687 1952 £71,974 1951 £92,513
Despite a wort receiver dating from 1909 and a Billings water tank from 1892, the plant and machinery at the brewery was relatively modern. Masons noted that, since 1947, Praeds had spent substantial amounts on property and plant. In addition to the healthy reserves, they commented on the somewhat unusual £70,000 in quoted securities.
THE ANALYSIS The analysis of Praed’s barrelage was as follows:- Tied Free Total 1949 28,714 6,579 35,293 1953 25,856 5,592 31,448 of which in 1953:- Cask Bottle Total Tied 17,487 6,422 23,909 Free 4,839 753 5,592 Subsidiary 46 1,901 1,947 Average prices per barrel were:- Cask Tied £13 19s 7d Free £13 14s Bottle Tied £20 5s 10d Free £20 5d Subs £20 3s 9d
Latest production Average Gravity 1952 30,096 barrels 32 degrees 1953 27,255 31
They stated “It would seem that the Vendors have either to admit a reduction in average gravities or else a larger reduction in sales; in either case it does not assist them in showing value for the trade on offer”. Analysis of gross profit less production expenses:- 1950 1951 1952 1953 £ £ £ £ Draught 89,624 80,492 89,189 87,681 Bottled 16,263 28,379 33,396 40,883 W&S 10,477 10,406 10,358 12,286 Mineral Water 9,599 9,954 11,769 12,001 125,963 129,231 144,711 152,851
Masons suggested that the plant had a value of £110,267 and the freehold and leasehold properties £790,321. The crucial fact would be the impact on Phipps’ profits of buying the business. An extra 23-24,000 barrels at a value of £30 each could be capitalised at £720,000. Hence, they were looking at 30,000 sales, but noted that “it would appear that the average gravity of the beers which you supply to your customers is some 3 degrees higher that the gravity of the beers supplied by the vendors”. At a cost of some 20s per barrel this would reduce prospective profit from £118,000 to £90,000. They pointed out the difficulty in raising the selling price to match the higher strength and suggested this would result in a possible fall in barrelage.
Phipps could consider the possibility of buying the properties alone, thus saving on redundancy costs. A going concern valuation of £25 per barrel would equate to £600,000, and they expressed doubts over the value of any goodwill. “However, the value to your business of this additional outlet is considerably more than its value to its present owners as a going concern because of production economies which you will be able to effect”. They also mentioned the risk of purchase by rival brewers.
The accountants used a figure for potential savings of £28,000, of which Phipps might surrender one half to the vendors, which capitalised at 10% provided an additional £140,000. Hence, a figure of £750,000 to which could be added a useful value of plant and effects of £50,000 to give the £800,000, without any figures for goodwill. They would also need to find £4,255 for stock in trade and £30,000 for a compensation fund. In a worst case scenario, absorbing the tied trade of Praeds might result in production of 25,856 barrels - 17,533 draught and 8,323 bottled. The likely cost figures for draught:- Phipps + 17 533 Praed Prime Cost £1,115 267 £177,000 Prod Cost £103,768 £12,000 Admin £77,251 £8,000 Delivery £30,301 £10,000 Selling £48,746 £13,000 £1,375,333 £220,000 Phipps 110,250 barrels cost £1,375,333 ie £12 13s per barrel + Praed 127,783 £1,595,333 ie £12 9s per barrel
Similar calculations for the bottled sales could see costs fall from £17 16s per barrel to £17 7s. Thus, by spreading the fixed costs of increased sales, the extra output would produce classic economies of scale which could be captured by Phipps. Their initial offer of £800,000 for the fixed assets only, began to make sense, but was not accepted by Praeds because liquidation might lead to a tax bill and it was felt that the £30,000 compensation fund should be outside the price. The view inside Phipps was that they “definitely wanted a net million and preferred the payment in cash”. Although there were difficulties with the subsidiaries companies and they were being asked a full price for control, it could see a fair return in 18 months to 2 years based on the economies of scale and the mineral water production.
THE OUTCOME On 25th March, 1954, David Jones told a packed meeting of Wellingborough licensees that his firm was amalgamating with Phipps.
“You may think that the amalgamation is a great pity in many ways. One regrets to see the death of an old family firm, which was started by a great uncle of mine, but it is something that has to be faced. Today the need is for productive effort by the most economic methods and I think the day must come when there is rationalisation...”
The newspapers regarded the bid as coming “out of the blue”, since Praeds were trading at 42 to 45s and had been only 24s 6d in 1953. They closed at 75s. The press commented that Phipps’ bid meant that the shareholders had trebled their money in four years. The takeover was completed by the due date of 31st March.
The brewery was to close on Tuesday 20th April, when Phipps would commence brewing and bottling with deliveries from 3rd May. Initially, it was planned to re-badge beer as Praeds and “such plant as is suitable will be removed from Wellingborough to Northampton”, under the direction of Mr Hipwell. Messrs Morton would dismantle the larger plant for storage at Northampton, and it was hoped that the mash tuns and hop back could be installed in the Autumn. The bottling unit was to be dismantled “with all speed” and installed at Northampton.
Various departments eg property maintenance, transport and mineral waters would remain at Wellingborough under the MD. The bottled beer site was sold. The old Brewery House, 10 Sheep Street, used as an office, would be sold, but the brewery foreman’s cottage at No11 would be retained for the caretaker.
Of the staff of 28, 16 would be retained, 9 offered alternative employment at Northampton and 3 retired. Unfortunately, the monthly allowance to staff of 1 bottle wine, 1 bottle spirits and 2 dozen 1/2 pints was to be dis-continued. Fortunately, David Jones seems to have retained his monthly drinks allowance of £36.
Of the 123 weekly paid employees, 78 would be retained at Wellingborough and 2 transferred to Northampton. CPT Williams the brewer would move to Northampton as 3rd brewer. Of the compensation fund some £10,000 went to the directors. David Jones became joint Managing Director of Phipps alongside ECM Palmer.
Some of the brewing plant was advertised for sale in the small ads section of the Brewing Trade Review for April. The Brewers Guardian for May stated that although brewing would cease the site would be used to produce mineral waters on a much larger scale. However, in 1955 it was announced that a new mineral water plant would be built for RC Allen at Northampton. That year saw the liquidation of the Praed subsidiary businesses, with the exception of Allens. The Praed’s site at Wellingborough was sold to cover the cost of transferring the RC Allen soft drinks production to Northampton. In February 1956 the proposed demolition of the Wellingborough brewery was announced and it had disappeared by the end of the year.
That year, Phipps went on to merge with their close neighbours NBC. In the late 1950s, times were difficult for the industry, national beer production was down 3.37%. For the new merged Group, sales were down 0.09%, and akin to current worries, cask sales were down 8% and profits 11%.
However, “in view of the anticipated small sales of keg beer, consideration is being given to purchases from Watney Combe and Reid”. The rest is history, and if you want to know more get yourself a copy of “Brewed in Northants”.