Bargain Booze announces IPO plans

The owner of Bargain Booze, Conviviality Retail, hopes to raise between £60 million and £65 million in an initial public offering on AIM at the end of July.

The chain of 611 cut-price off-licences based in the north of England is hoping to follow in the footsteps of low-cost retailers such as Poundland and Lidl, which have proved popular even in prosperous regions such as the south-east during the economic downturn.

"Value has been totally democratised," said chief executive Diana Hunter, who joined Conviviality from Waitrose earlier in 2013. "Everyone understands the importance of value now."

The float will leave the company debt-free and provide a payday for ECI, the private equity group that backed a £63.5 million management buy-out in 2006. ECI attempted to sell the group for £100 million in 2012. However, the float means that the investor has roughly trebled the value of its stake after it paid down some of Conviviality Retail's debt, replacing it with a loan note payable to itself.

Conviviality Retail has also been susceptible to the downturn. Revenues of £372 million for the year to April 30 were lower than the £395 million made the year before, as the chain, which operates under a franchise model, reduced the number of franchisees by 57.

Indeed, off-licences have had a particularly tough time in recent years, with Threshers, Wine Rack and Oddbins all falling into administration.

Still, Hunter expressed confidence that Bargain Booze would punch above its weight against the likes of Tesco. "We carry a deeper range in our assortment than a supermarket's convenience store," she pointed out. Conviviality Retail also said it would boost its wine range, which accounts for only slightly more than 10% of revenues.

Additionally the company, which would have a market capitalisation of between £62.5 million and £70 million, said it would use about 10% of the shares as a reward for franchisees who reach certain targets.

The float came in the same week that the UK government was expected to delay to its plans for minimum alcohol pricing in England until at least after the next election. Cut-price alcohol offered by supermarkets and discount retailers has frequently been an area of debate. Publicans argue that it encourages off-trade, or home, drinking. On the other hand, the health lobby argues that it promotes unhealthy drinking habits.

What investors can trade in the meantime?

Conviviality Retail will act as a competitor to already-listed Majestic Wines, the largest UK wine specialist, with 193 stores.

In its preliminary results for the year to April, Majestic announced total sales fell by 2.1% to £274 million, with like-for-like sales in UK retail stores ahead by 1%. Pre-tax profits increased slightly from £23.2 million to £23.7 million.

"We believe that Majestic has significant market share opportunity as it builds on its position as the UK's pre-eminent specialist wine retailer," Panmure Gordon's Philip Dorgan commented at the time of the results' publication in June. "We see many years of highly visible profit growth and we therefore remain buyers."

With the shares trading on a price/earnings ratio of about 15 times, Dorgan saw "scope for share-price appreciation".

Bethany Hocking, analyst at Investec, echoed this view, stating: "We view [the] ... rating as too low, given organic growth prospects, [a] strong management team and an attractive niche position." She had a 'buy' recommendation on the stock.

Edison Investment Research was also optimistic, explaining: "[Majestic's] scale, in combination with very high levels of customer service, multi-channel availability, in-depth product and customer knowledge, and an innovative approach to marketing combine to make it unique in the UK retail market."