Where Capital Bars goes others will follow


The New Year should see the exit of another small Irish company from the stock market, with the taking private of Capital Bars by the O'Dwyer brothers. Full circle, the O'Dwyers's takeover vehicle has extended its offer for 21 days, and one way or another a deal will be done with Mr Austin Conboy, the private investor who is holding out for a higher price than the 21p sterling which is on offer.

A litany of reasons has been advanced by Capital Bars for the surprisingly poor trading performance which underlies the equally poor share price performance of a hotel, pub and restaurant business at a time when consumer spending and alcohol consumption by young people are at record levels. Some of them definitely belong to the "my dog ate my homework" school of excuses, including blaming the Equal Status Act for not allowing the company's Dublin venues enforce the sort of door policies they want.

You would have to wonder how many of the punters queuing up outside Zanzibar, Fireworks or any of the company's other trendy Dublin bars even know this piece of legislation exists. Never mind - how many would challenge the bouncers to a debate on the issue!

Some of the other explanations, such as rising wage costs, the general economic slowdown and the impact on tourism of the foot-and-mouth epidemic are more plausible. However, Capital Bars' year end falls on September 30th, so the management only had limited opportunity to blame the events of September 11th for a pre-tax loss of €140,000 on turnover of €42.7 million last year.

Cynics - and there is no shortage of them - argue that the company's underlying performance is better than the figures indicate, particularly when you take into account the substantial rents paid to the O'Dwyer brothers - who own 44 per cent of the business - for a number of venues. When you also take into account the 55p sterling that rival publican Mr Hugh O'Regan bid for the company two years ago, it is not that hard to construct a conspiracy theory to the effect that the O'Dwyers have engineered a situation which will allow them take out the company on the cheap.

Such theories are attractive, but if you apply the maxim that the simplest answer is probably the right one, then you have to come down in favour of the less fanciful explanation put forward by the company for its problems. Capital Bars is, after all, a creature of the recent economic boom and it makes sense that it should suffer disproportionately when the economy slows unexpectedly and dramatically.

The branding behind its flagship venues epitomises the brash new affluence which it catered for and which is suddenly under threat. In addition, fashion is fickle, and the brothers' Midas touch may now be escaping them, with reports that some of the newest and largest investments are not pulling in the expected crowds. It was the ability of the O'Dwyer brothers to consistently hit the right note when opening new venues that gave them so much clout in Capital Bars since they merged their Dublin pub interests with Break for the Border as it was known in 1994.

The circumstances of Capital Bars' departure from the stock exchange will inevitably shine the spotlight on other small, narrowly focused companies that came to the market on the back of the boom - amongst them are estate agents Sherry FitzGerald and recruitment companies Marlborough International and CPL Resources.

These companies are pure plays on sectors of the economy that grew massively and rapidly over the last five years, but have been amongst the first casualties of the downturn. Marlborough, which came to the market in October 1997 at €1.22, is now trading at 36 cents, having reached €5.35 at one stage. An attempt by Mr David McKenna, the company's founder and former chief executive, to put together a management buyout fell apart in November and shortly afterwards the company announced a collapse in interim profits from €3 million last year to a loss of €1.17 million this year.

Times are also hard at CPL Resources which came to the market in June 1999 at 77 cents and is now trading at 30 cents. In October, the company chairman, Mr John Hennessy warned that this year's results will be significantly below last year's.

Sherry FitzGerald issued a profit warning in the run-up to Christmas, saying that its 2001 results will be substantially short of expectations because of significant losses in the second half of the year. Its shares are now trading at 96 cents compared to a flotation price of €1.99 in April 1999.

All three companies are still substantially owned by the individuals who brought them to the market. CPL is over 80 per cent owned by Ms Anne Heraty and her husband Mr Paul Carroll, while Mr Mark FitzGerald and the other senior management at Sherry FitzGerald control over 40 per cent of the company. Mr McKenna has 55 per cent of Marlborough and has already had one go at taking it private. It would be surprising if he did not have another tilt some time soon. Similar thoughts must have also crossed the minds of the major shareholders in CPL and Sherry FitzGerald given the uncertain economic outlook. On the basis of their companies' current share prices they would book tidy profits.

Such an outcome would - as always - be something of a disaster for the small shareholders, but the larger institutional investors will have taken their profits along the way and probably not object too strenuously. Barring the emergence of a few more Mr Conboys, the small investors will have little choice other than to take the modest amounts offered to them.

With hindsight it is hard to feel too much sympathy for them. Anybody looking for a long-term investment was making a mistake buying into companies whose business models were built around economic growth rates about which the only thing that could be said for sure was that they would never last.