A kick in the keg from punters
KING Consolidated earned a rather lukewarm reception from the JSE on its acquisition of the franchising and trademark rights of Keg Australia, but the pessimism seems misplaced.
It is mainly good luck that the Keg name prevails - Kingco's domestic operations include the Keg, one of seven branded pub and restaurant chains numbering 220 outlets. Kingco owns Bimbo's, Mike's Kitchen, Porterhouse, Saddles, McGinty's and Lusitania.
Chief executive Dennis Finch says the Keg Australia deal is another sequential phase of the group's offshore expansion. It is already active in Australia through Mike's Kitchen, and has earmarked Canada and the UK as other expansion targets.
Finch explains that Kingco was keen to buy Keg Australia when the chain was put up for sale by then owner Whitbread a few years ago. "But at the time, the sale would have included all the real estate too, which would have made it both expensive and risky for us," says Finch. So Keg Australia was sold to Pacific Restaurants.
Pacific's members took the trouble to come to SA to see how Kingco runs its keg pub-restaurants here. "Keg is not a yuppie place because fashions change too quickly. We are promoting Keg as a timeless, upmarket brand aimed at the 23-plus group, but catering to all."
Other parties were interested in buying Keg Australia but Finch believes Kingco offered the vendors something better. "We showed them what was wrong with their Kegs and how to rectify it." The trouble was worth it: 12 of the Pacific directors have taken franchises on the Keg Australia outlets under Kingco's proposal, and the onus lies with them to fill the vacancies as Pacific is responsible for meeting the profit warranty.
"Kingco has bought only the trademark rights and implemented the franchising contracts. We are making an upfront deposit of A$2-million (about R7-million) cash, and the maximum we pay will be A$3.6-million against the delivery of warranted profits of A$2.224-million a year for two years. We also have the right to onsell other franchises," says Finch. "It's a nice entry level, risk-free and with no liabilities on the leases." The deal includes a company-owned store in Melbourne, to be used for training, testing technology transfer and so on.
Kevin Hedderwick is the managing director of Keg International. He will oversee expansion from Johannesburg. Keg Australia will be managed out of Melbourne by Marc Cuspilli. The deal becomes effective from May, as both operational and financial due diligence exercises have been completed.
Finch says Keg Australia will receive 5% of the turnover (2% goes to advertising) of the 17-strong chain and royalties will flow out of Australia after the deduction of a 10% withholding tax. Income will not attract SA tax and Finch is satisfied the process is tax-efficient. He says Kingco has paid net asset value for the Keg Australia franchise contracts. These will make an immediate contribution.
"The outlets are on premium sites in high-quality locations, catering to the A-B income group. Critical mass is achieved immediately, justifying the financial support and infrastructure for Keg Australia."
Had the deal been in place for the six months to 31 August 1997, Keg Australia would have contributed R1.4-million or 2.05c a share.
Finch believes that many SA companies have come unstuck making offshore acquisitions because they have not gained critical mass. "It's not enough to buy one unit, put out a pub sign and say you're open for business. It takes more than that. Some South Africans have an inferiority complex. They don't believe they can succeed, but we've proved we can."
Even in the UK, the once-halcyon days of a being a pub landlord are no longer so lucrative after the shake-up in control over brewery-tied houses. "I think the UK pubs haven't made as much of their food as they could have. Our experience is that 70% of the pub-spend is at the restaurant and only 30% at the bar." Finch leaves for the UK next week to negotiate a major deal: "There are some bargains to be had".
He expects another good year for Kingco, which is trading at a historic price-earnings ratio of less than 10 at the current 145c. While it might take a small earthquake for Kingco to merit a major rerating, it offers value for money at this price and should show steady progress.