Friday, 2 March 2012

Arrol goes public

In the 1890's there was a rush of breweries converting themselves into limited companies. Looking at the details in the prospectuses, it's easy to see why they took such a step.

The standard trick was to divide the value of the company into two (often equal) parts. The preference shares which formed one half would be flogged to the public. The other part, the ordinary shares were kept by the directors. As only the ordinary shares had voting rights, the directors acquired a big wodge of cash but still kept control of the company. And in the good years of the 1890's, when brewers could make a 15%, 20% or even 25% return on capital, there was still plenty of profit left after distributing the fixed percentage (usually around 5%)  to the preference share holders.

Arrol's chose a more complicated structure, splitting the company three ways: preference shares, ordinary shares and debenture stock. That meant of the £450,000 the company was valued at, £350,000 came from external investors. Lucky directors. Though you'll learn later that things didn't quite work out as planned.

"The LIST will CLOSE on or before Tuesday for town, and noon on the following day for country.

ARCHIBALD ARROL & SONS LIMITED (With which is incorporated the business of Mr. John Meikle, of Newcastle-on-Tyne).

Debenture Stock £200,000
Share Capital £250,000

The First Mortgage Debenture Stock will be redeemable, at the Company's option, on or after the 1st July, 1915, at 110 per cent.

10,000 Ordinary Shares of £10 each £100,000
15,000 5.5 per cent Cumulative Preference Shares of £10 each 150,000

The vendors take the whole of the Ordinary Shares and one third of the Preference Shares in part payment of the purchase money.

The National Provincial Bank of England Limited, Bishopsgate-street, London, E.C., and Newcastle-on-Tyne, and the Commercial Bank of Scotland Limited, Glasgow, are authorised by the directors of the company to receive applications at the price of £104 per cent for £200,000 in Four-and-a-Half per Cent First Mortgage Debenture Stock, and at par for £100,000 in Five-and-a-Half per Cent Cumulative Preference Shares of £10 each, payable as follows :—

Debenture Stock. Preference Shares.
On Application £10 per cent £1 per Share.
„ Allotment 40 „  „ 4 „ ~ „
July 10th. 1895 54 „  „ 5 „

£104 £10

Trustees for the First Mortgage Debenture Stock.
Charles Harvey Combe, Esq., M.P. (of the firm of Combe and Co., limited, Brewers).
Sir John Nedson Cuthbertson (Director Extraordinary of the Commercial Bank of Scotland, Limited).
John Albert Black, Esq. (of the firm of John Black and Co., Shipowners), 26, Bothwell-street, Glasgow.

William A. Arrol,             { Sole partners in the firm of
Walter Arrol,                   { Archibald Arrol & Sons,
Archibald Tower Arrol,    { Glasgow and Alloa.
John Meikle,         Newcastle-on-Tyne.


The National Provincial Bank of England Limited, Bishopsgate-street, London, E.C., Newcastle - on - Tyne, and Branches.
The Commercial Bank of Scotland Limited, Glasgow, London, and Branches.

Slaughter and May, 18, Austin Friars, London, E.C. McClure, Naysmith, and Co., Glasgow, N,B.

Pimm, Vaughan, and Co., 1. Drapers' gardens, London, E.C.

Henry Graham, Smyrke, and Co., chartered accountants, Sunderland.

C. J. Andrews, 18, Austin Friars, London, E.C. ; 14, Bigg Market, Newcastle-on-Tyne ; and 16, Dixon-street, Glasgow.


This company has been formed to take over the well-known brewery business of Messrs. Archibald Arrol and Sons, which was established at Alloa in the year 1810, and to incorporate with it the business of Mr. John Meikle, of Newcastle-on-Tyne, and to acquire from him and from Mr. William Turnbull, of Noweastle-on-Tyne, 40 Freehold and Leasehold Hotels, Public-houses, and other Licensed Properties held therewith.

The Newcastle properties have recently been valued by Messrs. A. T. and E. A. Crow, valuers, of Sunderland, and Mr. Ralph Hindmarsh, valuer, of Newcastle-on-Tyne ; and the Scotch property by Messrs. Russell and Spence, of Glasgow, whose reports are embodied in the full prospectus.

The Mortgage Debenture Stock will be secured by a first mortgage on all the freehold and leasehold properties of the company, and generally on its business and undertaking.

The assets of the company comprise:—

£ s. d. £ s. d.
Freehold properties and fixed plant at Alloa and in and near Newcastle-on-Tyne, valued at 271,210 0 0
Copyhold and long leasehold premises and fixed plant. &c, in and near Newcastle-on-Tyne, valued at 33,150 6 0
Short leaseholds and fixed plant, valued at 6,640 0 0

311,000 0 0
Stock-in-trade, movable plant, casks, rolling stock, &c. guaranteed by the vendors at 56,364 0 0
Loans, book debts, &c, cash at bankers, and additional working capital, guaranteed by the vendors at 43,912 19 6

105,276 19 6
£416,276 19 6 

Of the £311,000, a sum of less than £20,000 represents the value of fixed plant, and the directors are satisfied that the £105,276 19s. 6d. representing the working capital of the company is amply sufficient for the purpose.

The books of the firm have been examined by Messrs. Henry Graham, Smyrke, and Co., chartered accountants, of Sunderland, who report as follows:—

"We have examined the accounts of Messrs. Archibald Arrol and Sons, of Glasgow and Alloa, for the three years ending 30th June. 1894, and the accounts of Mr. John Meikle and of Mr. William Turnbull, both of Newcastle-on-Tyne, for the three years ending 31st December, 1894 (the dates at which the respective financial years end). And we hereby certify that the average annual profits for the period after excluding all charges for interest, but providing for depreciation, amounted to £20,135 2s. 3d., and that the last year's profits were £20,485 13s. 5d. We also certify that if during the above-named period the Scotch beers purchased annually by Mr. Meikle and Mr. Turnbull had been purchased from Messrs. Arrol, the average net profits would have been £26,883 18s. 3d. Pr annum. We further certify that we have examined the book debts, loans, and interest (including sundry investments at the price of the day) belonging to Messrs. Archibald Arrol and Sons, and after making ample allowances for possible losses and discounts we estimate them to be of the value of £38,912 19s. 6d."

The price to be paid by the company for the purchase of the whole of the above-named businesses, assets, and goodwill, the whole being taken over as a going concern as from June 1st, 1895. has been fixed by the vendors, Messrs. Archibald Arrol and Sons, at the sum of £458,000.

The terms of sale are embodied in three contracts. For details see full prospectus.

Full prospectuses and forms of application may be obtained at the company's office, and of the bankers, brokers, and solicitors."
Manchester Courier and Lancashire General Advertiser - Monday 27 May 1895, page 1.

There's a lot to consider in there. It's more complicated than the usual launch because two firms were being merged into one limited company: Archibald Arrol & Sons and John Meikle's Newcastle business.

The valuation is fascinating. Note the emphasis placed on the fixed plant being less than £20,000. Which means that the overwhelming majority of the £311,000 valuation for fixed plant and property was the latter. Presumably in the form of pubs. Because that was one of the points of the deal, to combine Meikle's pubs in the Northeast with Arrol's brewery..

As this makes clear: "We also certify that if during the above-named period the Scotch beers purchased annually by Mr. Meikle and Mr. Turnbull had been purchased from Messrs. Arrol, the average net profits would have been £26,883 18s. 3d. Pr annum." By supplying Arrol's beer to Meikle's pubs, profits would go up.Or at least that was the theory.

As you know, Scottish breweries didn't generally built up large estates of pubs, relying on free trade accounts. But in the 1890's, stuffed with cash from going public and seeing the number of licensed premises being driven down by a hostile licensing regime, English brewers had been buying pubs like crazy. This looks like a move by Arrol to hold onto their outlets in the Northeast. An area which had been a very good market for Scottish brewers.

Looking at the figures, there seems a problem to me. Average annual profits were around £20,000. On a capital of £408,000 that's only 4.9%. Even allowing for the greater profit from Arrol supplying the beer, the profit was just £26,883, or 6.4%. But the preference shares were a fixed 5.5% annually. That doesn't seem to leave much profit for the directors. Compared to other Scottish brewers like Tennent, the profits look quite poor in relation to the capital employed.

Smyrke - what a fitting name for an accountant. Remember that name. It will be coming up again soon.


Gary Gillman said...

The vendors took 1/3rd of the preference shares, so they'd get a piece of that dividend too.

And each likely would have been salaried, the net profits in other words being calculated after same.

Deal seems not as rich though as others of the period. Maybe there was a specific factor whereby they expected the equity to grow fast.


Ron Pattinson said...

I assumed that the preference shareholders got a guaranteed 5.5% and any remaining profit went top the ordinary shareholders, i.e. the directors.