Sunday, 11 March 2012

Arrol flourishing?

Spin. There's nothing new about it. Companies have always tried to show themselves in a favourable light. Though there's a fine line between clever spin and outright deception.

I've been keeping a close track of the statements made by Arrol about the state and progress of their business. And I've started noting inconsistencies. Did plans change or were they deliberately misleading investors?

Here's how their 1900 annual meeting was reported:

"The fifth annual general meeting of the Ordinary shareholders of Archibald Arrol & Sons (Limited) was held yesterday within the head office, Dixon Street, Glasgow-Mr Wm. Auchincloss Arrol, chairman, presiding. The report showed that notwithstanding the advance in the beer and spirit duties, the profits showed an increase of nearly £4000 over those of last year. The profits for the year were £37,270, and after providing for depreciation, direction, and management there remained £31,426. Debenture interest absorbed £9000 and Preference shares dividend £11,125, leaving £11,300 for payment of 10 per cent. per annum on Ordinary shares. The report also stated that a further issue of £75,000 in Preference shares was made in August, 1899, the proceeds of which were applied to paying off certain mortgages, acquiring additional properties, and increasing working capital. The issue was largely over-applied for. The Chairman, in moving the adoption of the report, said the company at the close of the fiscal year in May last had been in existence five years, and during that time it had flourished, having made constant and regular progress. For the first financial year the trading account showed £26,295 profit, and at the close of last year, 31st May, the fifth year, the profit on the trading account amounted to £40,569. Therefore during the period of the five years that the company had been in existence the profit on the trading account had increased £14,274. When the company came into existence they secured 40 licensed houses in and around Newcastle; now they held 80. When the company was promoted in 1895 they were interested in 32 houses in the rest of the United Kingdom; now they were interested in 135. The first year's trading, so far as the brewery at Alloa was concerned - taking that as a basis, and to show the progress of the company - has been one of steady improvement, last year's trade compared with the first year showing an increase of 66 per cent. Mr John Meikle seconded the adoption of the report, which was unanimously adopted. The Chairman then formally moved that a dividend of 10 per cent. per annum,, being 5 per cent. in addition to the 5 per cent. interim dividend already paid to the Ordinary shareholders, be declared, the dividends to be paid on 1st September which was seconded and carried unanimously. Mr William A. Arrol was re-elected chairman, and Mr David W. Kidston, C.A., auditor.
Glasgow Herald - Thursday 23 August 1900, page 8.
That's typical for drinks companies: start off with a complaint about tax. How rosy was the financial picture in reality? Let's look at those figures more closely.

Profits were up almost £4000 - hurray! But hang on. That new preference share issue meant an extra £4,125 in dividends every year. Gobbling up more than the increase in profit.

I'm having trouble comparing the figures for annual profit, because they keep using a different basis. But one thing is for sure: using the trading profit figures makes them look best. The nett profit had only increased from £23,585 to £31,426. Or about 33%. While over the same period the trade of the Alloa brewery had increased 66%. So the profits weren't increasing anything like as fast as turnover.

Those pub numbers don't tally, either. The prospectus for the new preference share issue claimed they had 86 freehold and 150 others. Here the numbers are 80 and 135 respectively.

Odd that they say part of the new preference share money had been spent on "acquiring additional properties". When before issuing the shares they had specifically said that they wouldn't use any of the money for "brick and lime".

Flourishing seems rather an exaggeration. Especially when compared with the results of other brewing companies. And remembering that the 1890's were some of the most profitable years ever for British brewing. How did Arrol fare when times got harder? I'll be answering that soon.

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