The Whitbread legal team has not been short of work – in the last 18 months alone, they have handled more than £2bn worth of deals for the company. Mary Mullally speaks to Simon Barratt, head of the team, about what makes a winning formula
As Simon Barratt, legal affairs director and company secretary at Whitbread, surveys the view from his 25th-floor office at City Point, the significance of the outlook over London does not escape him.
Hundreds of feet below is the old Whitbread Brewery building in Chiswell Street where Simon and his team were based until the beginning of this year.
“We are looking down on 250 years of history,” Barratt says. “That is where the group started. It sold beer from there for two-and-a-half centuries.”
But the closing years of the 20th century saw a radical transformation of Whitbread – until last year one of the largest brewers in the UK – from a drinks-
led brewing conglomerate to a focused leisure group.
With the beer orders legislation and an ailing beer market in the mid-1990s, the group adopted a change in strategy and launched an offensive on the hotel, restaurant and leisure industry with a series of acquisitions (see sidebar, opposite page).
And the last couple of years have seen Whitbread break free from its beer connections with the sale of its breweries, pubs and off licences.
The Whitbread Beer Company went first, in May last year to Belgian brewer Interbrew. Next went the off licences, to Japanese investment bank Nomura International and finally, in May this year, Whitbread broke all links with its past with the sale of its pubs and bars division to Morgan Grenfell Private Equity.
The sheer scale of the transformation of the group has brought with it a huge volume of work for the three-strong legal function. In the last 18 months alone, Barratt’s team has handled seven deals, worth more than £2bn, including the sale of the group’s beer business for £400m with ancillary agreements worth more than £150m, the sale of 120 pubs to Enterprise for £120m and the de-merger and takeover offer for its pubs and bars division, valued at £1.625bn.
This year the team won the award for legal team of the year at the Legal Director Bluechip In-house awards. But it was not just the sheer scale of the transactions that won the team their peers’ admiration. What particularly impressed was the way in which the team managed the transactions.
“They deal as easily with the board as external advisers, and individually and collectively know how best to deploy their own resources and considerable expertise,” one admirer says. “Moreover, they do all this while being unfailingly pleasant and engaging people.”
Barratt joined Whitbread as group legal adviser 10 years ago. In the late 1980s he moved from Slaughter and May to the Heron Group, which was in the midst of the fallout from the Guinness fraud scandal. Although the trial was well under way by the time Barratt joined, CEO Gerald Ronson was sentenced to one-year’s imprisonment while he was there.
Barratt declines to give any details of the case, which was referred back to the Court of Appeal earlier this year.
But he says that Heron was a great place to be an in-house lawyer. Having had its fingers burnt once, the group was loathe to ignore its legal advisers.
“It was an extremely good experience but a slight luxury,” he says. “When the lawyers said that the board should do something, they tended to do it. Which is good and bad since it means it can be too easy sometimes. It is more interesting when you have to influence and persuade.”
Barratt’s first two years at Whitbread were spent establishing the legal function on the radar of the business.
His predecessor Michael Hampson had already set up an in-house team. “He realised that what you do not need is a lot of people putting the company seal on things,” says Barratt. “What you need is to start giving proper legal advice to the group.”
Barratt adopted the strategy and built on it. When he joined the group there was one trademark agent and one solicitor on his team. He replaced the agent with another solicitor and set about increasing the profile of the team within the group.
“We basically wanted to be more visible,” Barratt says. “And in doing so we probably made the mistake of offering ourselves out on everything that came along.
“We did that for a couple of years and realised that we were doing too much work, or too much of the wrong type of work.
“But at the time it worked well because we got ourselves known.”
The team then had a look at what it was really there for, Barratt says.
“We decided that ultimately we are here to service the main board and group executive in the major transactions,” he explains. “We had to retrench a bit. We decided that the priority was to give a fantastic service on those projects.”
With the in-house team closely involved on the major transactions, they set up a ‘legal directory’ of external advisers to advise the business units on the balance of the work (see sidebar, page 26).
Barratt’s team is now divided into the legal function of three, including two lawyers – Russell Fairhurst, group legal adviser, and Tanya Msimang, solicitor – and the company secretariat function
of four.
There was also another solicitor who left the group last year on maternity leave. Barratt says he took the view that it was an inopportune time to recruit, given the group restructuring.
“The team has slimmed down to take account of our new shape and the work we expect,” he says. “We knew which way the group was going and it was unfair to bring someone in at a time when the group was retracting.”
All three lawyers trained in the top City firms. Barratt is ex-Slaughters; his second in command Fairhurst was also at Slaughters and Ashurst Morris Crisp; and Msimang joined from Allen & Overy.
The three are M&A specialists – a deliberate decision given the strategy of the group, Barratt says.
Armed with this expertise, the team was equipped to deal with the huge volume of transactional work that came its way.
Initially it was acquisition-heavy as the group moved into the leisure area with the buy-out of David Lloyd Leisure; and bolstered its hotel portfolio with the addition of the Marriott Hotel group, Costa Coffee, Bella Pasta, Cafe Rouge and the development of its Travel Inn group.
In 1998 Whitbread agreed to merge its retail beer and wine stores with Allied Domecq into a new company called First Quench. It sold one of its five breweries, 253 of its traditional pubs and 40 of its Beefeater restaurants.
But the group was hit badly in 1999, when its attempt to buy more than 3,500 UK pubs and restaurants from Allied Domecq for £2.9bn failed when rival Punch Taverns pipped it to the post at the final hour.
Whitbread had put in an offer for Allied Domecq in an attempt to establish a further hold in the pub market. The transaction went through its normal course up to the point of a signed agreement when Punch Taverns elbowed its way in with an audacious bid for Allied Domecq by making a direct offer to the shareholders.
Whitbread was embroiled in controversy after it fell foul of an Office of Fair Trading (OFT) ruling that blocked its bid. Its decision to publicise details about an informal interview with OFT saying that the regulator would clear its proposed offer for Allied Domecq met with a sharp rebuke from the OFT, which said that it had yet to clear Whitbread’s bid. Punch was successful and the group and its advisers, including Clifford Chance, came in for some heavy criticism.
Barratt refuses to be drawn on the episode except to say that he does not blame Clifford Chance: “There was some suggestion that they were to blame. I went on record afterwards saying that they gave an excellent service – it was part of the heat at the time – a lot of our advisers came under attack.”
Nevertheless, Clifford Chance, which had been the group’s principal adviser, has not been instructed on any major transactional work since then.
Slaughter and May was brought in to advise on the massive £1.6bn demerger and sell-off of the pubs and bars division, which was completed earlier this year, and Barratt confirms that Slaughters is now the group’s main corporate adviser.
What must be particularly galling for Clifford Chance is that Slaughters was instructed by Punch Taverns, which successfully acquired Allied Domecq.
While Barratt acknowledges Slaughters did “an excellent and innovative job” for Punch, he says this is not the reason Whitbread chose to instruct the firm.
He says the fact that both he and Fairhurst were solicitors at the firm was one factor. “We had been talking about using the firm for a long time. It helped that we knew the quality of the people and the partners there,” he says. “I had always thought that they were a good firm but they had always been on the wrong side of the transaction.”
Slaughter and May won some good work. The pubs and bars transaction was a complex restructuring process, Barratt says.
With the failed attempt at Allied Domecq last year, the group agreed to sell all its pub holdings to Morgan Grenfell Public Equity, a unit of Deutsche Bank, in a £1.65bn transaction.
A new holding company was created, the pubs and bars division was passed to that company and then passed out to a separate company – named Fairbar, using the first syllable of Barratt’s and Fairhurst’s surnames – which was then bid for.
“The shareholders have been through it all this year,” Barratt says. “They had to approve a new holding company; they
had then to approve the pubs and bars transaction, and then the offer from Morgan Grenfell.”
The transaction began in September last year and was completed in May.
It was hard going, but Barratt is a firm believer in retaining some quality of life for his team. “If you go through that sort of period then you must make up for it some other time – that is where we have the luxury over our colleagues in private practice.”
And this goes for external advisers as well. Barratt is a supporter of Richard Winter’s move at Bass to limit the number of hours that law firms do.
Unlike Bass, he does not formally censor firms for clocking up more than 10 hours a day, but the team does keep a close eye on sleepy-eyed associates.
“If we notice that someone is dead on their feet at a meeting I’d be inclined to ring up and give the contact partner a gentle prod – is it time for a night off?”
Barratt believes that the role of the in-house function on a large transaction is to act as the manager of the external advisers and co-ordinators within the company, as well as picking up the areas where they can add value.
One of those areas is due diligence. “We are in a unique position because we have to live with the contracts,” Barratt says. “We are therefore the ones who go into the data room – it is not much help to have a report from someone else which has 10 caveats at the bottom.”
For Barratt, the individual partners and their interpersonal skills are key when it comes to instructing external advisers.
“It has to be partners we enjoy working with,” he says. “You have to work very long hours, you are stuck with them at the weekends and will see them more than your family sometimes. Why not be able to have an enjoyable conversation and a drink with them? I hope that people also enjoy working with us and it won’t be: Oh no, it’s that Whitbread on the phone again!”
As well as getting on with the in-house team and the clients, the partner also has to be someone who holds weight with his or her colleagues within the firm.
“We want someone who is able to martial resources and make sure things happen at the right time – a person who can put a team together which is going to produce the sort of results that we need and a team that you know will work well with the Whitbread people.”
For Barratt that partner at Slaughter and May is Martin Hattrell and the client contact is head of M&A Michael Pescod. With Pescod leaving Slaughter and May shortly, Barratt is keen to establish a relationship with another partner. Last week he took the CEO and finance director for lunch with now senior partner Tim Clark and Hattrell to discuss the future working relationship between the client and the firm: “It is a great shame that Michael Pescod is going – he is a very big part of Slaughter and May,” he says. “There has to be someone else who is a different level of contact to speak to about work. We had the lunch to speak about what we are getting up to in the next year and what value the firm can put into it.”
Barratt speaks with the voice of a man who is closely involved in the strategic thinking of the company.
He sits with the board – not on the board – as company secretary. The key as an in-house lawyer, he says, is to make sure that you have the ear of the management: “We want people to ask our advice; this is the most important thing. The trick is to persuade companies that they need the legal function and I think we have successfully done that over a period of time. I don’t say: ‘I’m the legal affairs director. You must listen to me’. That is not the way it works. It is very much down to the individual to command respect.”
For him the true value of the in-house adviser is the value he or she brings to the business.
“The future of the company is more focused than ever on value for money to shareholders, and my contribution is to make sure that the legal advice in the negotiation and implementation of agreements is completely aligned to that,” he says.
“Our existence is dependent on providing shareholder added value. I like to think we assist the business in delivering shareholder value. This is the sort of language lawyers should be speaking.”
