Recruitment and Selection - Greene King Plc

Financial Decision Making

Business Report Analysis

Word Count: 2534

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Company: Greene King Plc

Greene King (GK) was established as a brewery in Bury St Edmunds Suffolk in 1799 and now consists of 1900 pubs across the UK. Through mergers and acquisitions it has grown to be one of the largest in the country. Having just had an offer of £774mil accepted by Spirit Pub Plc for a merger, in which Spirit shareholders would own 28.9% of the new company and Greene King’s would have 71.1%, GK are set to be the largest in the country if the deal is successful. Spirit Pub currently owns 1227 pubs meaning that the combined group would own a total of 3127 pubs.

Greene Kings acquisition strategy has consisted of purchases low performing companies and employing a costs savings strategy has managed to return these businesses to profitability. Some key acquisitions in the past have been the Scottish group Belhaven for £187m which added 300 pubs and extended their market reach into Scotland another was Hardy’s and Hanson’s for £270mil which added 268 pubs.

Chief executive Rooney Annand has recognised that the pub and restaurant industry are showing significant similarities of late, he states that growth opportunities exist in capitalising on these (Financial Times 4/11/14). A large number of Greene Kings pubs are hungry horse restaurants and Loch Fyne Seafood and Grill. Food sales accounted for 41% of their retail business.

Part 1

There are many sources of long term finance available to a company. If a firm is able to do so the best option is to use internal sources of finance, these being retained earnings. When these internal sources are exhausted a company will look to external sources. These include market debt, long term loans or equity finance. There is conflict between theories surrounding this topic and the uses of these sources but optimally they centre on the notion that firms must act to maximise shareholder wealth (………).

Agency Theory

Shareholder wealth can face challenges and often managers act in ways which fail to optimally benefit the stakeholders. This can be observed in agency theory (……………….). Agency theory concerns the relationship between managers and stakeholders (………..), stakeholders being those who have a legitimate claim on the firm (………………). Agency theory can be seen as self-serving behaviour from the manager (………..) at an individual level and a conflict of goals at an organisational level (…………).  

Static Trade-Off

The static trade-off theory (……………) was born from the work of Mogdiliani and Miller (1963) which stated that benefits could be obtained by a firm taking advantage of a long term debt ratio which consequently results in a tax shield. The static trade-off theory goes by the notion that there is an optimal leveraging ratio which comes from the balance of expected costs of financial distress and the amount of non-debt tax shields (……………).  

Pecking Order

The pecking order theory (………………………) establishes a hierarchy in which a company uses particular sources of finance. The order basically goes by the risk that they present to the company. Rather than establishing a target debt ratio the pecking order theory holds that debt should be avoided unless necessary through absence of internal sources. Debt and equity both pose adverse selection premiums; the premium is however larger in equity hence equity is a much riskier direction to take than debt (……………….). An outside investor will therefore require higher return on equity because of this risk.