Andrew Teare is confident that his leisure focused Rank Group will thrive. But his critics want results - soon.
Andrew Teare has had a rough ride since becoming chief executive of The Rank Organisation almost two years ago. His decision to give a more focused leisure and entertainment emphasis to his company made sense.
So did his desire to formally divide the company into four divisions, namely film and entertainment services, the Hard Rock brand, holidays (including the famous Butlin's holiday resorts) and leisure (nightclubs and bingo). Unfortunately for Teare, the stock market seems to have got it in for him. The share price slumped from 545p shortly after he succeeded the abrasive Michael Gifford in April 1996. It fell to a nadir of 278p 12 months later, before struggling up beyond 300p again. The disastrous stock market performance has highlighted the fundamental question about Rank for Teare and his management team: is this venerable giant of Britain's leisure industry a beached hulk, salvageable only by self-implemented demerger or predatory break-up? Or is there, as Teare believes, a treasure-trove of latent value striving to emerge from the shadows of its antiquated image?
The question has been complicated further by becoming entangled with the issue of Teare's personal rating. When Teare was head-hunted from ECC (the former English China Clays) by chairman Sir Denys Henderson, the former ICI chief, his standing in the City could not have been higher.
But no sooner had Teare got his feet under the table at Rank's elegant Connaught Place head office, near London's Marble Arch, than the bottom fell out of the ECC share price. Apart from difficulties in ECC's core business, it had become clear that the Teare-inspired diversification into US speciality chemicals was in a bit of a mess.
With ECC shares floundering, Rank and Teare suffered a severe case of market jitters. The previously positive 'Teare factor', undoubtedly a factor in the Rank board's recruitment decision, went into reverse. Instead of seeing him as a breath of fresh air after the years of Gifford's tightly drawn regime, many City analysts and investment managers began to regard Teare as a millstone round Rank's neck. It has taken Teare and his company more than a year to stabilise in City eyes. And at around 350p - the price at which Rank shares stood early in the New Year - Teare seems to have lost an awful lot of ground in the process of recovering equilibrium.
One New Year survey of investors even identified Teare as the most disappointing CEO of a FTSE-100 company.
Rank had a hill to climb before Teare arrived, but is that now turning into Everest? Teare seems unfazed by the criticism. 'It was never going to be a breeze,' says the phlegmatic chief executive. 'But if 18 months ago, someone had said, "Where do you want to be by the end of 1997?" I might have optimistically said that I would like to be where we are today.
I think we are in front of many of the structural issues now. We are able to get in and work in a business which is much more focused than it has ever been on leisure and entertainment.'
That much is indisputable. Teare and his top team, some of them stalwarts from the Gifford era, others freshly recruited, have significantly re-shaped what was a highly diversified group, sprawling from Butlin's to cathode ray tube manufacture, to the well-known Rank Xerox documents business.
The quietly-spoken Teare, with his lack of a leisure industry background, may appear more like a business school graduate conducting an exercise in portfolio management than an innovative leader, but virtually all the moves he has inspired - most of them disposals, but also including big organic investments in Rank stalwarts such as Butlin's, and some key acquisitions, such as the Tom Cobleigh pub chain - seem to make sense.
'We had a lot of famous names and brands which really needed a considerable amount of investment,' Teare says. There was also a deeper cultural element in his reorganisation of the group's structure: 'Rank had been run with a very financially orientated view of life, and we needed to bring a more innovative and integrated way of running it, a way that was concerned about its people as well: people are the meat and drink of the leisure business,' he believes.
Certainly Teare operates in a very different way from the forceful Gifford, a former finance director of Cadbury Schweppes, who made an indelible mark at Rank during his 12 years at the helm. Rank under Gifford was a combination of strongly centralised executive management and fragmented operations, with most subsidiaries having their own administrative structures and information technology systems. Asked why the cost-conscious Gifford kept the businesses separate, one long-time follower of the Rank chief says: 'Because Mike always wanted to have the option of disposal.'
In fact, Gifford was as much a holder as a seller and his legacy to Teare was a curate's egg. While he extracted Rank from hotels with a sustained disposal programme, he retained clearly peripheral businesses such as Rank Precision Engineering, the cathode ray tube company. He also laid some of the foundations on which Teare is building. By buying Mecca, one of Rank's main rivals in the leisure industry, for £950 million in 1990, Gifford acquired a group that Teare himself says 'contains the seeds of some of the best businesses we have got now in leisure'. Gifford also sold 40% of Rank Xerox's interest for £620 million in 1995.
Teare, who similarly wants to shed Rank's half-share in Universal Studios, Florida, had no doubt that one of his first priorities should be the complete exit from Rank Xerox. 'I wanted to get out of that as soon as possible.
It was the biggest call we made and we had to do quite a substantial restructuring to put ourselves in the position to do it.' The restructuring was necessary because Gifford, before his departure, characteristically ensured that the £620-million sale would be done in the most tax-advantageous way possible. In order to achieve that, Gifford had to set up a complex agreement which tied Rank to retaining its remaining shares for years ahead. But once Teare had taken over at the helm, he decided that that agreement must be unravelled. He surprised many observers by rapidly reaching a deal with Xerox under which the stake was sold completely in return for four phased instalments, totalling at least £920 million - near its book value - and possibly extending until 2000. The vehicle for continuing to escape capital gains tax was the creation of a new company - Rank Group - which absorbed The Rank Organisation's entire share capital.
In the process of the renaming, Teare killed two birds by pushing the group further from its J Arthur Rank heritage. And Teare soon went further, by selling Rank Film Distributors (RFD), the historical core of the group when it was founded in 1935, to Michael Green's Carlton Communications.
Apart from its distribution network, RFD was part-funding films and had a library that was like a lexicon of British cinema, including Brief Encounter, Great Expectations and the Carry On films. Teare says it all had to go.
'We were financing up to 50% of the cost of movies with budgets up to £50 million. One of the first things I did here was to meet our big Hollywood customers for the video duplication business. They were spending more per movie than we would be spending in three years on our total film production.
We had no media channels to maximise returns from our library. The library was worth more to someone else and someone else bought it.' Precision Industries also went, as did Resorts USA, an American holiday business, some American property, and Shearings, the coach holiday operator: 'It was the only tour operator we had and was competing aggressively with our other businesses for customers,' says Teare.
The total disposals programme was valued at £300 million and the streamlining strategy was based on what Teare has made his central objective: raising Rank's annual return on capital employed (ROCE) to 15%. Returns were well below this level, and in some businesses were in single figures. 'Rank had historically looked at cash-flow on projects going out seven or eight years that were heavily weighted in residual values,' says Teare. 'That wasn't producing a cash-generative business and it wasn't appropriate for the leisure industry.'
With this in mind, Rank paid almost £96 million for the Nottinghamshire-concentrated Tom Cobleigh pub-restaurant chain - less than six months after Teare's arrival. At just over £2 million a pub, since Cobleigh had 44, many analysts suggested that the deal looked expensive. Teare stuck to his guns, insisting that Cobleigh was the perfect way to plug the one gaping hole in Rank's leisure portfolio, its lack of a food brand. Says Teare: 'In leisure, you have to get your product right up front. If you aren't filling a new pub, club, or cinema in year two, you're not going to because you will have got it wrong. New venues are the top performers in this industry. The 15% hurdle is a very big structural change for Rank; it has knocked out a number of proposed capital projects that the operating businesses would have liked.'
At the same time, Teare injected about £170 million of Rank's property assets into a joint development venture with British Land and its chairman John Ritblat. 'Historically, Rank has been a huge holder of freehold properties,' Teare says. 'That pulls down your returns, because they are lower on property than you are going to make from a successful leisure venue.
It means your whole product, delivery and pricing is not being tested.
Teare's essential aim, with the disposals and the new financial targets, was to create a new transparency that would change Rank management's behaviour.
By stripping away everything that could obstruct both management's clear view of the businesses and his own, he intended to focus efforts on enhancing performance. The emphasis on ROCE was controversial, with some industry experts reckoning that Rank was wrong not to make operating profits growth the key driver. But Teare maintained that ROCE is the measure that, more than any other, determines a business' fundamental health and future.
To fulfil his objective of making line management both more accountable and more independent, the core interests had to be restructured. Those of the 25 individual Rank businesses that stayed in the portfolio were re-grouped into four divisions: film and entertainment, Hard Rock Cafes, Leisure and Holidays (which is headed by Jerry Fowden). In a departure from Gifford's practice, the financial record of each business was disclosed.
'That has exposed a number of warts as well as jewels,' he says. 'People have had to adjust their thinking about some of the businesses. But it puts a lot more pressure on each of the operating managers to deliver: it means sweat on everybody's brow.'
Part of the change was straightforward: film and entertainment, which had been based at Rank's Connaught Place headquarters under the previous boss, Jim Daly, was instead based in Los Angeles under Daly's successor, Phil Clement, who was already in charge of the highly successful film laboratories and video duplication operation over there. But in other areas, the consolidation task was enormous. John Garrett, the former Gillette executive and now head of Rank leisure, which accounts for more than a third of the group's profits, had the exacting job of integrating into a single divisional head office at Maidenhead a variegated range of operations and systems which had previously worked at arm's length from one another.
He also gained control of Odeon, which he and Teare rightly concluded was really a leisure, rather than a film activity. 'All the businesses had operated with separate administrations, separate offices and so on,' says Garrett. 'Shifting them all to Maidenhead has been something not far short of traumatic. Essentially, we restaffed the whole unit. We now have common codes of accounting, common computing systems and common purchasing.'
There have been some silver linings. Because almost all the systems had to be renewed in the transition process, Rank has now tackled the Millennium bug which threatens to cause industry such a huge headache. Garrett started the integration process in March 1996. 'The benefits will start coming through in the middle of this year. The major benefits will be in 1999,' he says. They range from sizeable cost savings on procurement or IT, to the gains from 'just being able to lean over a partition and talk about a common problem'. Tom Cobleigh had an unexpected synergistic benefit for Rank on this issue: 'Because they are a very new business, most of their stuff was 2000-compatible,' says Garrett.
Garrett is in no doubt whatsoever that the Cobleigh deal, though ostensibly expensive, will more than pay its way. It is already figuring in the cinema multiplexes that Rank, having missed the initial boat with Odeon, is now developing in many mid-size towns. 'Take Kettering: Bass would have been in there with a pub-restaurant if we hadn't had Cobleigh,' says Garrett.
'Today, you have to have a food operation as part of a leisure complex, and we needed someone with the expertise to give us the alternatives of other food concepts. All these leisure parks have two or three eating establishments. Strategically, buying Cobleigh was the right thing to do.'
The Cobleigh brand is being hugely expanded as Rank takes it nationwide.
Since the acquisition, the estate has been increased by about 50% to 72 pubs, and the number will be boosted to almost 100 by the end of this year. At that level, it should certainly be earning the return that Teare wants, although some analysts suggest that Rank underestimated the cost of investing so heavily in the group. 'Rank was a bit naive in thinking it could expand Cobleigh at this speed without investing heavily in extra resources,' says one leisure expert.
But if the jury will stay out on Cobleigh for a while, there can be no doubt that Teare did the right thing in what was his first major acquisition: paying £270 million to buy Peter Morton, one of the co-founders of Hard Rock, out of the business. Under Gifford, Rank's rights to Hard Rock (which came into the group through Mecca) were limited to North America east of the Mississippi, Europe and Asia. That excluded two of the biggest regions for the brand: the American west and Latin America, as well as Australia. After explosive growth, operating profit had slowed in recent years, rising less than 12% in 1996 to £46 million. Much of Hard Rock's thunder was being stolen by other themed restaurants, notably Planet Hollywood, started by the other Hard Rock co-founder Robert Earl, who still has a lawsuit outstanding against Rank.
Teare believes that will all now change. 'Hard Rock had veered a bit towards the food-and-T-shirt mentality. One of the tasks is to take it back to its music roots, because that's what made it great and will make it great again.' The man he is looking to for brand revitalisation is Jim Berk, Hard Rock's new chief. Berk appears to have the necessary credentials, having joined Rank from the US National Academy of Recording Arts and Sciences where he ran the Grammy awards, the rock industry Oscars.
Berk, who started at Rank the same day as Teare, says: 'The problems that existed in the Hard Rock portfolio were very similar to those for Rank generally. 'The company had sat pretty quietly; it didn't have an aggressive growth agenda.' Berk is certainly making up for lost time: he has launched Hard Rock hotels, resorts, books and, most significantly, a record label. Regular live music shows now take place in US Hard Rock Cafes. At the same time, Berk has completed the global unification of the brand by taking control of Hard Rock Canada and franchises in the Caribbean, Argentina and even Cuba. More Cafes are being opened: up to 20 next year.
Just as, in its modest way, Cobleigh is developing new food offerings, so Berk is leveraging the Hard Rock brand by developing new chain concepts.
One move is a link-up with America's National Basketball Association to launch a basketball-themed chain. To British audiences, that might look strange, but apart from being big business in the US, basketball is fast becoming an international brand. Both Berk and Teare scoff at suggestions that Hard Rock should be floated off from Rank. 'Internally, Hard Rock Cafe staff refer to themselves as the crown jewel of the Rank empire,' says Berk. 'One mustn't ever sell the crown jewel. It got a little dusty, a little tarnished. We are cleaning it up and putting it in a beautiful box for young people to come and see.'
Nonetheless, if Rank shareholders and potential investors fail to appreciate Rank's newly revealed value, pressure for demerger - not just of Hard Rock, but of the whole group - will become increasingly hard to resist.
Brian Newman, Rank expert at the stockbroker Henderson Crosthwaite, believes that Teare has moved so far, so fast that he has left people behind. 'The restructuring was carried out at a very rapid pace. Michael Gifford probably did too little towards the end, so the rush to catch up was understandable, but if anything, it was a case of too much, too quickly. The whole company was in turmoil,' Newman says. 'Now what is required is a pause, so management can demonstrate that they can deliver the profits from the reconstituted group. That is the key.'
Teare acknowledges that the cost of such radical change has held up delivery of the benefits. But he believes there was no alternative: 'We had to have a swift change in the portfolio. It probably has delayed the growth and the profits coming through, but if you don't get things done as quickly as possible, you are always fighting on the back foot. It is only by abrupt and deliberate change that your own people notice things are different and start to adapt their own behaviour.'
One of the few things Teare has not changed is Rank's famous symbol, the man with the gong. He retained it when the film distribution arm, with which it was most closely associated, was sold. 'It is internationally recognised and I don't think it relates exclusively to the films,' Teare says. 'Banging a gong is anticipatory: you bang the gong at the start of the performance, whatever it is. So it has some relevance to Rank as the group moves forward.' But investors will want to see their anticipation rewarded soon. Otherwise, that gong will be more like a knell, sounding the doom of Teare's new model Rank.
Andrew Lorenz is business editor of the Sunday Times.