The Financial Director Interview- A thirst for growth at S&N

Is it something in the water, an unyielding affinity with the product or uncommon loyalty which keeps senior managers so long at Scottish & Newcastle?

At the time of chairman Sir Alick Rankin’s recent retirement, the triumvirate of chairman, chief executive and finance director could boast a combined service record with S&N of more than 80 years. It’s a record that must eclipse just about every other plc and, given the growth of the company under their management, defies the corporate maxim that boardroom longevity breeds stagnation.

Certainly group finance director Derek Wilkinson – known to colleagues as “Blades” – gives the impression of being as enthusiastic about the company’s growth prospects as he would have been when he first joined the group as an ambitious 30 year old.

Just two years after the #425m acquisition of Courage, a deal which gave Scottish & Newcastle top slot in the UK beer market, Wilkinson is hinting of another big deal. While the process of integrating Courage into the group is still ongoing, “you can expect Scottish & Newcastle to be growing again”, he says. “We are clearly always looking for opportunities to expand our business. I don’t think we are about to stand still now.”

During his 24 years at S&N, Wilkinson has watched the group grow from a regional beer company with barely 6% market share to the country’s biggest brewer with a share of nearly 30%. In 1988 he and fellow directors defiantly withstood the predatory onslaught of Australian-controlled Courage and its outspoken chairman John Elliott, and then, seven years later, turned the tables completely by acquiring the former predator. As finance director of the beer division and later group FD, he has also seen S&N develop a strong portfolio of pubs throughout the UK, including the newly developed themed Rat and Parrot chain, and diversify into the leisure sector with the acquisition of holiday companies Pontins and Center Parcs.

According to Brian Stewart, chief executive and a former group finance director of Scottish & Newcastle, Wilkinson has been a crucial player in the company’s growth although he has never been afraid to sound a note of caution when necessary.

Wilkinson, he says, is authoritative and disciplined and a useful counterpoint to enthusiasts in strategic planning. “It is critical that the finance director has the capacity to stand back and be extremely dispassionate about company performance. Derek is quite unflappable, he doesn’t let a business challenge get to him.”

Although born and raised in Edinburgh, Wilkinson never imagined he would end up spending most of his working life there. He started out as an apprentice with accountancy firm William Home Cook & Co, where he worked on audits ranging in size from Standard Life and the Hydro Electric Board to small fishing net factories. It was enjoyable work with great diversity but Wilkinson was convinced that he had little chance of progressing far within the accountancy profession at that time without the right family connections.

His own father had been a policeman. The day after he qualified, Wilkinson handed in his resignation.

But his brief period in the profession gave Wilkinson a solid grounding in finance. And a few lessons about life too. He recalls vividly turning up for one of his very first audits at a fishing net factory sporting a three-piece suit and rolled umbrella. Already feeling slightly out of place and painfully self-conscious, the young Wilkinson had to walk the length of the factory floor to get to the administrative office. “Some of the comments I got from the women sewing the nets are unrepeatable.”

Having decided against a career in the profession in Edinburgh, Wilkinson, like many of his peers, “hot-footed it to London”. He set off south in his Austin A40, 100,000 miles already on the clock and the seats piled high with his worldly belongings.

He soon found a job in internal audit in what is now Reed International.

This provided Wilkinson with the bridge he was looking for between the profession and industry. “Rather than go straight into a line role in industry, I wanted to have the chance to meet lots of people and get a better sense of what aspects of finance interested me,” he says. “When I talk to young accountants nowadays I try to convince them to take the same route.”

In the early days of his audit work for Reed, Wilkinson was sent to look at one of the group’s stationery businesses. He identified that the stationery company was not invoicing for some of the work it was doing, a discovery which led to the sacking of two of the business unit’s senior executives.

It was, paradoxically, both a high point and low point in his career at that stage. He earned credit from senior management for his diligence but on a return trip to the site, Wilkinson was made uncomfortably aware that the two sacked executives had been extremely popular and, perhaps unsurprisingly, he was not.

After two years at Reed, at the age of 24, Wilkinson was ready to get his hands dirty, to do more than merely vet other people’s work. He took up a management accountant’s position at a small firm called Ultra Electronics, now part of the Dowty Group.

“I didn’t do my research very well because it turned out Ultra was a loss-making company with all sorts of cash problems,” he says. One area of its defence contract work was the manufacture of submarine detection devices. These had to be sent for testing in batches of 20 and payment was only made if the whole batch passed. “We were short of cash which made it crucial to get the samples through. As a result, cash management became a major feature of my life with Ultra.”

The importance of cash is something that has lived with him ever since.

“If you run your own business the first thing you do when you come in each morning is look at the cheques that have come through the post and look at the bank balance. In a lot of big companies people tend not to do that. I allow myself the luxury of looking at the Scottish & Newcastle bank balance once a week rather than daily but it is a culture and discipline that I consider to be really quite important.”

One of Wilkinson’s colleagues at Ultra was Tony Thatcher who was to go on to become chief executive of Dowty. “The two of us used to sit and plot how we would make the company more profitable,” Wilkinson recalls.

“We were fairly low level but we came up with a scheme on one occasion to make radio telephones for taxis with some of the surplus stock we had.

“We actually made the products but unfortunately the taxi drivers were poor payers and we had to hire an ex-policeman with an alsatian to collect our cash.”

After he had been with the company for four years, and had progressed to the position of divisional commercial director, Wilkinson was headhunted by a former Ultra marketing director who had gone to Rank Organisation.

It was a critical point in his career and Wilkinson still wonders what would have happened if he had decided to stay in a commercial environment rather than go back into finance.

Wilkinson joined the Rank Radio International division, which was then going through a phase of significant expansion and “hiring people like there was no tomorrow”.

It was a complete contrast to Ultra. At Rank there appeared to be surplus cash around. The business was actively seeking to expand its share of the consumer electronics market. But the growth strategy proved too ambitious.

“We were competing against the Japanese and Rank Radio did not win the battle. After two years of that I felt I wasn’t getting anywhere.”

Wilkinson had no great desire to return to Edinburgh but the vacancy in the finance department of Scottish & Newcastle’s beer division was attractive.

“The driving force was I wanted to be in a company where I understood the product. In Ultra we had produced air intake controls for Concorde which, frankly, left me totally cold. Beer is a relatively simple product and something which I felt I would be able to talk about on a level playing field with the marketing people.”

In 1973, when Wilkinson joined S&N, the group was in the process of de-centralising its main functions. Previously, all decisions had been made in Edinburgh so if a pub in Bristol wanted a loan that decision would be made at head office without any particular knowledge of its landlord or location. “Decentralisation was successful in creating local autonomy, local decision making and an organisation much more responsive to what the customer wanted,” he says.

In terms of growth, the group was struggling to change its public image as a regional brewer. It had been very successful through the late 1960s and early 1970s in expanding its product to the south of England and the Midlands, on the back of the popularity of its Youngers Tartan Bitter.

But by the late 1970s trading was becoming more difficult and the company could not seem to slough off its regional brewer status in the eyes of competitors or the City.

This began to change in 1985 when Scottish & Newcastle bought Moray Firth Maltings for #23m. Although the purchase was to provide a secure source of raw materials for the beer division, it was considered at the time to be a very big decision for the company. “But that put us on the acquisition trail and we haven’t looked back since.”

The next big acquisition was Home Brewery, in 1987, which gave S&N 400 extra pubs in the Nottingham area.

“It was one of the few brewery acquisitions where there was negative goodwill and by that I mean the assets were worth more than what we paid for them. The company owned a lot of surplus property around Nottingham so it was a very well-backed deal in terms of the asset base of the organisation.

The strategy behind buying regional brewers was to expand the S&N pub estate further south. “The economics of brewing are such that if you get a solid base of retail pubs then the infrastructure you have reduces your distribution costs into the free trade.”

In 1988 came the acquisition of Matthew Brown at the second attempt – the first having been thwarted by the competition authorities. It was a keenly-contested takeover bid and the real trophies of the battle were more tied pub estates in the north west of England and the Theakston brand.

The Courage bid for S&N followed soon afterwards, heralding one of the most frenzied periods in Wilkinson’s career.

“We had our defence manual in place as all good companies do but inevitably it gets thrown out the window when the real thing happens,” he recalls.

Even so, morale was high and the adrenalin was racing. There was a rush to value the S&N brands, to organise protest marches to Westminster and rallies in Edinburgh and to dispatch people to Australia to find out more about John Elliott and the Courage parent company Elders IXL (now known as Foster’s). And representatives of the Monopolies & Mergers Commission paid a visit to the Edinburgh headquarters for “quite the most lavish lunch of my life”, recalls Wilkinson.

Wilkinson and the rest of the S&N management team were so convinced that the company would suffer in the hands of Elders that they put together a standby management buyout plan with SG Warburg which, had it gone ahead, would have been the biggest MBO of its day.

But the secret MBO plan was never enacted because S&N won the battle.

But the Elders bid did force the S&N team to look long and hard at the company’s assets and make a decision it had been agonising over for some time – the sale of Thistle Hotels. “We had the view that hotels consume cash and don’t necessarily generate cash if one owns them – they were not delivering shareholder value,” he says. In what was a case of either uncanny judgement or lucky timing, the hotels were sold for u645m just ahead of a significant fall in the property market.

Another key decision was to move into the leisure sector through the acquisition of UK holiday operator Pontins and Dutch-based Center Parcs.

By 1993 S&N was back in its stride as predator, striking again with the #622m acquisition of Chef & Brewer which, with its concentration of pubs within the M25, fulfilled the S&N corporate goal of attaining national coverage. The purchase was partially funded by a u400m rights issue. It was the first Wilkinson had been involved in and he was not overly impressed by the flat 2% underwriting fee structure.Unusually, the Chef & Brewer deal managed to take the City by surprise. “The negotiations went on for many months and, given the number of people in the know, to keep it secure was quite incredible and all credit to those involved,” he says.

The C&B deal was finalised at 7.20am after all-night negotiations and announced to the Stock Exchange at 7.30am. “Our lawyer who had put a fantastic effort into all of these talks fell asleep during the analysts presentation that day, he literally fell off his chair.”

Rory Macnamara, deputy chairman of Morgan Grenfell, worked closely with Wilkinson on the Chef & Brewer and Courage takeover bids. “Derek has the ability to remain calm and collected no matter how frantic things become,” he says. “He is analytical and very tough on principle.”

The takeover of Courage in 1995 was particularly satisfying and rewarding for the S&N board. But Wilkinson hastens to praise the previous Courage management for maintaining and developing the business ahead of the bid despite a statement from the Foster’s chairman that the Courage operation had become a “black hole” in the Australian group’s finances.

“It has been a massive integration effort by our beer team to merge the two businesses together. We said we were going to save #70m-#75m on the cost base and we are well on target to achieving that. The City was a bit sceptical at first because the earlier merger between Allied Lyons and Carlsberg-Tetley had not delivered the expected cost savings.”

Apart from a touch of revenge, the Courage deal has helped S&N to strengthen its brand portfolio which, according to Wilkinson, brings market share and muscle. “One of the accounting quirks is that on the balance sheet the breweries are worth nothing at all. Your ability to sell a second-hand brewery is pretty restricted and it is the brands which are worth a great deal. Probably the brands should be on the balance sheet but accounting convention doesn’t work like that.”

While Wilkinson may have once questioned whether he ought to have stayed in a commercial role, former chairman Rankin is completely convinced the FD chose the right path. “Derek has always been a most reliable and resourceful character and, in many ways, the backbone and engine room of the beer division’s growth. He has got particularly good all-round knowledge of the industry.”

“If he has managed to become finance director of a FTSE 100 company then he has not got it wrong,” he says.

Rankin says Wilkinson is a “very balanced person who can be a very calming influence when others around him are getting rattled. He is very conservative.

He could be classified as a safe pair of hands rather than one of the great entrepreneurs.”

Rankin’s praise for Wilkinson is echoed by Stewart who describes him as “the epitome of a good finance director” and “a much better FD than I ever was”.

Wilkinson has no regrets about staying so long with the same company, although he stresses S&N has changed beyond recognition over the past two decades.

“Had it been the same today as it was in 1974 I would not still be here; very few of us would have stayed. People respond to change and are stimulated by it. While the company continues to grow and change then it is a very rewarding place to be.”

Curriculum vitae

Name: Derek Wilkinson
Age: 53
Education: Royal High School, Edinburgh

Career:
1961: Begins five-year apprenticeship at William Home Cook (now part of KPMG).
1966: Joins internal audit function at what is now Reed International.
1968: Joins Ultra Electronics as management accountant.
1971: Moves to the finance department of Rank Radio International as marketing controller.
1973: Returns to Scotland to join Scottish & Newcastle.
Serves as finance director of the beer division before being appointed group FD in 1991.

Interests: Golf and skiing.

Derek Wilkinson – devolution:
My personal view is I don’t feel devolution brings much to Scotland.

From where I sit I don’t see any added value to me, the company or any of my colleagues from a devolved government. We ought to be thinking about being on a bigger stage instead of thinking parochially.

– accounting standards
I think we need to take things more slowly now. There has to be more debate and dialogue now that we are getting into the more difficult areas of deferred tax and goodwill than before when David Tweedie was pushing on an open door.

– corporate governance
I get concerned at times at the amount of management resource being devoted to these issues. Management’s job is to control, there is no doubt about that, but I suspect we are now getting a disproportionate amount of effort going into these areas and we are legislating on the majority because of the abuse by the minority.

– treasury
When I think back to the foreign exchange transactions I conducted at Rank, committing several million pounds three or four months in advance with very little training and no real supervision, it makes you understand how the Barings situations of this world happen. At S&N, I make sure I get a daily report of all the dealing done in the treasury function.

– raising capital
The cost of raising capital through rights issues has got to be reduced. I’m glad to see that there has been a move to make rights issue costs more competitive but we still need more change. I never miss the opportunity to lobby on this issue.