SFI shares fall 66% as cash runs out

SFI, the high street pub group best known for the Slug and Lettuce and Bar Med, yesterday issued a profits warning and cancelled the payment of its final dividend.

Shares in the debt-laden chain plunged by 66% as it also admitted breaking banking agreements.

Takeover speculation rose as it emerged that this year's profits are likely to be below market expectations, despite healthy summer drinks sales during the World Cup and the Queen's jubilee celebrations. Old Mutual Securities warned yesterday that management is "unlikely to get the chance to turn it around".

Rival group Luminar, the owner of late night bars including Jumpin' Jaks and Chicago Rock Cafe, has been cited a possible bidder after previously expressing interest in Yates's Wine Lodge.

A rapid expansion programme left SFI with 186 bars, many of them highly profitable. But the group is short of cash and struggling with debts of up to £130m, according to drinks industry analysts.

The group said it had been granted temporary waivers after breaching banking conditions. "The company is working constructively with its bankers towards revised facilities which the board expects to be in place around the end of the calendar year." It promised a "period of consolidation with an objective of reducing gearing and strengthening the balance sheet".

SFI had capped its new bar openings before yesterday's announcement, cancelling six after institutional pressure. But as recently as last month, SFI told the City that it was meeting its financial obligations - a rapid change of mind that shook confidence.

SFI's like-for-like sales in the first 18 weeks of the financial year were only 1.8% higher than the previous year's. It attributed a relatively poor performance to a tough market, particularly in London's west end. It had been hoping to release cash through the sale of its For Your Eyes Only chain of table dancing clubs, but a sale did not materialise.

With the Litten Tree chain, Bar Med and the Slug and Lettuce, SFI has become a big player in the huge £2.75bn market. Its immediate troubles stem from the acquisition of the Parisa chain of restaurant-bars, which it is converting to the Slug and Lettuce brand, along with the downturn in trade and its inability to sell For Your Eyes Only.

Investec Securities analyst James Wheatcroft cut his estimate for SFI's 2002-03 pre-tax profit by 10% to £21m, saying the falling shares could lure predators. "The problems are mainly financial, rather than operational," said Mr Wheatcroft, who has a "reduce" recommendation on the stock. Yesterday the shares closed down 51.5p at 27.5p.

Greg Feehley from Old Mutual Securities said poor management and profitable brands have left SFI vulnerable to takeover. "Cash is king, and they have run out of it. They expanded too quickly."

Other analysts suggested that SFI's debt could prove impossible to clear at present. "Whoever buys this buys an estate that's 100% leasehold and highly geared into any downturn," said one. "Buying a business geared at 140% exaggerates variations in trade. They're getting squeezed between Weatherspoon and Luminar, not a good place to be."

From salsa to aspirational young slugs

The Litten Tree

A chain of 57 pubs in provincial towns, focusing on food and satellite television. SFI calls it a "chameleon operation . . . in that its trading style changes between daytime and evening to attract different consumer targets".

The Litten Tree day starts with coffee and pastries, proceeding to karaoke, football and tribute bands before the party animals take over.

Average net weekly sales last year: £18,450.

Slug and Lettuce

One of the best known brands on the high street after 19 years of serving food and drink to professionals. SFI bought the chain in 2000 and now has 58 outlets - with wooden floors and big windows. "Its aspirational-premium nature makes it a leader in the wine bar-brasserie sector," says the group. Average weekly sales last year: £18,315.

Bar Med

This was originally aimed at a "quality daytime customer" and drinkers looking for a "lively but restrained evening". But there has been a change of policy and the 24 bars are now "focused towards entertainment Ibiza-style". Lunchtime paella is followed by late night high-jinks for the alcopops brigade. Entertainment and partying are "core values" for Bar Med and Fiesta Havana, SFI's Latin brand. Average weekly sales last year: £21,549.

Fiesta Havana

There are 17 themed bars cashing in on the salsa craze. Food, music and dancing with "opulent decor" and Cuban cigars. SFI describes the background music as "a smooth and sophisticated mix of Latin lounge classics blended with the bossa nova of the Brazilian beaches and the hot salsa of South America".

Live bands and dance classes add to the atmosphere.

Average weekly sales last year: £25,725.