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The City: Enterprise boldly goes by Ron Emler

Published:  18 January, 2007

The 3-billion battle over Spirit Group is still raging, but when Enterprise Inns says it is not interested in the pubs chain, you have to take notice. Effectively, Enterprise has said it is
no longer interested in expanding its 8,500-house empire, and that growth will now come from improving the returns from its present estate (give or take a bit of churning at the bottom end).

Enterprise head Ted Tuppen reckons that if his team can't improve an outlet, then it is very unlikely that anyone else can. Hubris? Perhaps; but Tuppen's record is second to none. Enterprise listed on the London stock market 10 years ago. Since then, the value of its shares has multiplied 21 times (with dividends reinvested). Compare that with the stock market itself having just about doubled in value over the same period. True, much growth has come from expansion by acquisition, but the Enterprise share price is not a reflection of a young go-go company.

It has been remarkably consistent. As commentators have been eager to point out, its latest results show that annualised returns to shareholders have averaged 35% - exactly what it has delivered this time around.

And Tuppen certainly has no intention of letting the record slip. He has raised the dividend by 50% and is promising to return cash to shareholders with a share-buyback programme worth

at least 200 million. And there is also the prospect of a further 50% rise in dividend payments next year.

It's a clever plan because it implies that the share price will also grow by about 35% by this time next year. Adding to shareholder value in this way is much less risky than buying extra (marginal-quality) pubs and converting them from management to tenancies. Tuppen will continue to buy selected parcels of pubs (but not chains) and then sell off some of Enterprise's own poorer performers - but only if they add to the quality of the estate.

For the evidence that such a strategy works, take a look at the latest results. Underlying profits rose by 32% to 306 million, with operating profit per pub increasing by 8%.

The continuation of that impressive record has to be subject to some doubts, however, since synergies from expansion will inevitably diminish. Yet while high-street bars have been having a tough time, well-run local tenancies providing a secure income stream have proved their worth.

The change of emphasis away from acquisition has not phased investors. Enterprise's shares are at a record of nearly 900p and valued at nearly 13 times forward earnings. That is certainly not cheap, but just ask Tuppen's peer group which of them offers the same track record coupled with solid forward prospects.