The Financial Director interview: Ian McHoul, group FD of Scottish & Newcastle

FTSE-100 group Scottish & Newcastle isn't that Scottish anymore, or Geordie for that matter. But group finance director Ian McHoul says that arguments about S&N's domestic presence are a distraction. "We are an international business, but we still employ 2,000 people in Scotland," he says.

The problem with S&N's identity crisis is that apart from stalwarts such as John Smiths, Courage Best and Newcastle Brown Ale, its leading brands are all overseas beers - Australia's Fosters lager, Kronenbourg from France and Russia's favourite Baltika. It also has Chinese, Portuguese, Finnish, Greek and Indian interests, and, in January 2004, decided to close off its Fountainbridge Brewery in Edinburgh, ending 255 years of Scottish brewing history. Soon after, the Financial Times ran a competition to suggest a new name for the Scottish & Newcastle that better reflected its new business, where 'Somewhere & Nother' and 'Shanghai & Novosibirsk' came out as favourites. But McHoul says such pressure will be resisted: "No, we are not changing the company name and there are no plans to do so."

Historically, S&N's image hasn't been helped by its conglomerate structure based on three distinct business units - brewing, pubs and leisure. But when McHoul joined as group FD in July 2001 from his position of FD of subsidiary Scottish Courage, the group was already starting to refocus.

Leisure businesses Center Parcs, Pontins and its managed pubs were sold in 2000 and the S&N board began the lengthy process of divesting its retail pubs. The group finally sold its remaining 1,400 pubs and Premier Lodge hotels to the private equity-backed Spirit Group in October 2003 for £2.5bn, leaving S &N as a pure-play brewer.

The company culture has changed, too. At one point before McHoul joined, the group finance director, chairman and chief executive of S&N had 80 years of experience at the company between them. Now, with the retirement of S&N's HR director, McHoul will become the company's second longest-serving executive director. "I've been in the job less than three years, so that's a radical turnaround," says McHoul. "Tony Froggatt, our chief executive, has only been with the business 10 months and John Dunsmore, who runs our UK business, has only been on the job 19 months or so. There has been a massive turnaround, both in business profile and in people."

McHoul's job is to get S&N operating like a cohesive company rather that a hotchpotch of brands. "What I am looking for from a finance perspective is how to run one company," he says. "So how do we pull the finances together across the group? How do we pull together the processes, the systems, the procurement activity, operational effectiveness and breweries? How do run one business called Scottish & Newcastle rather than a bunch of smaller businesses called Kronenbourg, Scottish Courage, Hartwell, whatever?"

To do this, McHoul has had to change the remit of the finance function. While he says his predecessor Derek Wilkinson was great at the "nuts and bolts" of finance, McHoul's style is to spend more time on S&N's strategy, corporate development, mergers and acquisitions, and acting "outside of the finance function in the general management of the group".

While McHoul is dealing with strategy and operations, the day-to-day running of the finance function and technical issues are handled by the "excellent" team he inherited from Wilkinson. "I have very strong people with me who are experts in these fields. I have absolute trust and faith in them," he says.

McHoul has also recently taken on group-wide responsibility for systems after a proper "debate with teeth" about how best to restructure group reporting lines. But McHoul says it doesn't matter where responsibilities lie because the S&N senior management are not hierarchical. "Tony Froggatt is strong on systems and processes, and he's got all the access he wants to my people," he says. What does matter is that S&N established group-level functions, something that was impossible before the sale of its pubs business.

With McHoul's hands-on management style and his interest in general management, it is understandable why he was tipped to replace chief executive Sir Brian Stewart, former group FD himself when he moved up to be non-executive chairman of the group. Stewart's natural successor, MD Guy Dickson, announced his unexpected retirement at the end of 2002 and a nine-month search for a new chief executive began.

McHoul soon found himself the press's favourite internal candidate for the top job - something that came as a shock. "I never imagined I would be someone in the frame or anywhere near it," says McHoul. "I knew I hadn't got all the experience required. But when you see your name in the press a number of times you start to think, 'Well, this might be interesting.'"

Froggatt, a 55-year-old Australian with experience at Seagram, Cinzano and International Distillers & Vintners, was selected as chief executive in April 2003 after institutional shareholders reportedly put pressure on the board to select an external candidate with a few more grey hairs to bring experience and a fresh approach. But, in the end, McHoul says he was "just pleased to get on with it" as the delay meant the group lost some precious months when strategic decisions weren't taken. "Some of the advances we have made since Tony's arrival were delayed."

While the group's decision to sell off its remaining pubs coincided with Froggatt's appointment, McHoul says the decision was taken primarily because of changes in the market. "We were originally looking at a sale and manage-back transaction. So we would sell the pubs but retain a long-term contract to manage them. But Six Continents was looking to demerge its businesses and that generated a huge appetite from venture capitalists in the pub sector. A lot of potential buyers with deep pockets became interested in buying our pubs lock, stock and barrel."

McHoul assumed overall charge of the bidding process. But despite having a senior manager running the day-to-day mechanics of the sale for him, McHoul still found that the deal ate into his time as he was "guiding, participating, doing conference calls, etc."

"It was a fairly self-contained business, but the complexities were its sheer size and the fact that we had such a large number of interested parties. When we initially put the pubs up for sale we must have had 30 or 40 credible notes of interest," McHoul says. And even when the field was narrowed down to a few strong contenders the process didn't get easier.

"A number of bidders were themselves conglomerates or consortia. There were venture capital houses or a venture capital house in alliance with a trade buyer. So, while we were negotiating with them, they were negotiating among themselves and would have fallouts. That was time-consuming for us."

McHoul's job was to ensure the company received the best price for the pubs - anything over the book value of the estate of £2.3bn. But other factors had to be taken into account, such as what the bidder would do with the pension fund, what tax planning they had in place and whether a lucrative beer supply contract could be worked into the deal. "Negotiating a deal is one thing, closing it is another. You have to use your judgement.

Do you spin the deal out for another two weeks to get more value or do you run the risk of disinterest creeping in? You also run the risk of consortia falling out leaving one guy who knows he is the sole bidder.

I believe we got it right, but we will never know," he says. With the £2.5bn S&N raised from the sale, McHoul set to work on his balance sheet. "Some of the money was spent in advance on buying HP Bulmer, the cider business, for £300m. We also announced that we would be expanding our interest in Portugal. That meant we had debt levels of about £4.5bn and a gearing of about 150%. Now even though debt is quite cheap at the moment that is a high gearing," he says. After paying off the banks, S&N is left with debts of about £2bn and the ability to make acquisitions.

"I loathe the phrase 'war chest' but the journalists all use it. We just have greater flexibility."

McHoul is not in the market for making any billion-pound deals but will focus on acquisitions like Bulmer, which was "low risk, in an existing territory, had high integration benefits and big top-line synergies. These are not high profile or sexy, but generate good financial returns."

The pub sale had a dramatic impact on S&N's finances, hitting operating profits by £230m and earnings per share by 20%. Shareholders' wallets will be lighter, too, which means McHoul has to spend more time managing expectations. "As a consequence of the disposal, we had to reduce our dividend by one-third, which we had already said back in April 2003 when the disposal was first announced. Most of our shareholders saw it as necessary. However, there were some income funds who were not happy at all."

Going forward, the S&N board is turning its attention to overseas operations to fill the vacuum, especially its joint venture with Carlsberg in BBH, the brewer of Baltika beer - Russia's number one beer brand with a 33% market share. Russia is expected to contribute a quarter of S&N's future profits and McHoul says it is a huge opportunity for the group - even if the risks of doing business in Russia are well known. "The Russian and Ukrainian beer markets are huge. They are countries which have a propensity towards alcohol," McHoul says. "I can't say there is less risk in Russia than in France because there isn't. There are country risks that are greater, however we think the rewards more than cover the risks."

But with all the changes in S&N's business, moving its year-end from April to December to bring all the business units into line financially and the future impact of international accounting standards, corporate communications is moving up McHoul's agenda. "I have commitments to see shareholders. Well, it's their business, isn't it? If it wasn't for them I'd be out of a job. It's easy to forget that."

McHoul just wishes the sell-side analysts made more effort to understand his business. "Some of the analysts are not that strong," he says. "They are there to form a view on the facts and I don't take umbrage if I don't agree with their judgement. They are entitled to do their job. But what I dislike is when people get the facts wrong or have a bias and spin every piece of news into something negative."

The analysts' current preoccupation is that S&N is now so focused and streamlined after the pubs sale that big brewers like SABMiller might see the group as a potential takeover target. McHoul says the analysts have a point, but it shouldn't be seen as negative. If anything, it shows that S&N has got its recent strategy right. "The brewing industry is consolidating," concludes McHoul. "If we add value and run the business better than in the past, and that makes us attractive, well, that's what we are paid for."

CURRICULUMVITAE
NAME Ian McHoul
AGE 43
QUALIFICATIONS ACA

CAREER
2001-1998-2001: Group finance director, S&N
1995-1998: Finance director, Scottish Courage
1985-1995: Finance and strategy director, Inntrepreneur
1985: Various positions, Courage, including general manager of Fosters KPMG

Biggest challenge?
Trying to juggle responsibilities at work with having a wife and two young children. That is definitely the biggest challenge.

Biggest hassle?
See previous answer.

Which company would you like to be FD of?
I'm quite tempted to say Diageo because I like the beverage industry. I like its market positions and I like its brands. But, saying that, Nick Rose is a very capable individual.