Guinness’s 1886 IPO

Some of the most anticipated initial public offerings are for those companies already at the top of their industries but which have remained privately-held for a long time. Some large companies are held privately for more than a single generation. When they announce a public offering, it piques the interest of more investors than those IPOs of companies that are new entrants to their industries or far smaller. One such company raising capital through an IPO in the 1880s was the brewer Guinness, which in addition to being storied, was also already the largest brewer in the world.

The 1880s Investment Boom

The financial community in London was kept busy in the 1880s. New companies were founded from scratch during these boom years and were successfully raising capital despite having no history whatsoever. Others firms courting investors were conversions of existing firms, often simple partnerships, into new public companies. Usually, this process involved a conversion from a private partnership to a limited liability company, under the regulations set out in the 1862 Companies Act. Many breweries took advantage of the opportunity to go public in the 1880s investment boom, including Arthur Guinness, Son & Co.

Changes in the Brewing Industry

The brewing trade was undergoing substantial changes that made these companies look for new investment. Breweries were becoming more involved in the retailing of their products in British pubs. No longer one step removed from the end customer, they formed arrangements with pubs to provide financial support in exchange for the latter only serving products from a particular brewery in some categories. Fearing being excluded, other breweries felt the need to do the same when their competitors were reaching such arrangements. Already by 1886, 70% of pubs in England and Wales were tied to a particular brewery and this share was increasing.

The financial support provided by breweries amounted to purchasing a pub and its license for a publican to manage. As breweries bid for pub properties to crowd out their competitors, the valuation of pubs sharply rose. This, of course, only crowded out independent publicans, further requiring the intervention of breweries in the pub business. Yet, these investments involved very large expense, turning brewing into an even more capital-intensive industry, and encouraged breweries to raise capital in the public market.

Besides the forays into the retailing of beer, consolidation and the need to employ new technologies in steam power, refrigeration, and bottling, added even more to the capital needs of the business. For example, in the twenty years between 1866 and 1885, Guinness had made nearly £750,000 in long-term improvements to its Dublin brewery; this sum excludes any routine maintenance. Altogether, the effect of these changes were new exchange-listed breweries. Whereas in 1860, there were about a half-dozen of them listed on the London Stock Exchange, this increased to eighteen by 1885

Arthur Guinness, Son & Co.

Guinness was a particularly successful brewer. Its Dublin brewery at St. James’s Gate was by far the largest in the world and brought to such position after it was leased by the Guinness family in 1759. In the 1880s, the facility produced three times as much beer as the largest London brewery, that of Barclay, Perkins & Co.

St. James’s Gate Brewery depicted c.1840

Guinness produced over 750,000 hogsheads of beer per annum. In 1885, among Dublin brewers, its exports of porters were ten times those of the nearest local competitor. Among all brewery firms in the United Kingdom, Guiness’s advantage was only growing. According to the company’s 1886 investment prospectus, it produced just 9% more beer than its largest competitor back in 1881; by 1885 though, it had produced 46% more. Further, by 1885, its profits had tripled since the early-to-mid 1870s.

The firm seemed to be making a lot of money. Also, as it happens, the need to make investments in pubs, which drove the capital needs of its peers, did not apply to Guinness. It did not pursue the strategy of other firms, in part because it was not a direct competitor to the other large brewers who produced other ales besides the stout porters which comprised 100% of Guinness’s business. This insulated it from exclusivity deals pursued by so many of its peers as its products could still be offered in the ‘captive’ pubs of other brewers. That said, funding new investment in its facilities remained a capital need which did apply to Guinness. Also, there were still other reasons to pursue a public offering.

An initial public offering, or IPO, offered the owners the chance to partially exit their investment, allowing them to diversify wealth away from a single firm. They might have been happy to reduce the time spent managing the business too, in which case the loss of control that a reduction in their investment would have meant was only another advantage, rather than a drawback, of the IPO. Head of the family firm, Sir Edward Cecil Guinness, had said he was finding running the brewery too taxing though he and two other members of the Guinness family would nonetheless continue to serve on the company’s board of directors.

Caricature of Sir E.C. Guinness, 1st Baronet by Sir Leslie Matthew Ward, published in Vanity Fair, 1891

The IPO would amount to a conversion of the brewery from a private holding of the Guinness family to the principal asset of a new firm, Arthur Guinness Son & Co., Limited. This company was formed to issue bonds and shares and use the proceeds to buy the brewery from Sir E.C. Guinness himself.

Securities Offered

The IPO was arranged by Barings, the premier London bank that would have also placed the loans of foreign governments in the London market, as it had for decades. In fact, the Guinness public offering was as large as many of the foreign loans placed by Barings. Sir Edward Cecil Guinness had discussed the idea of selling out his ownership of the business with Barings’ competitor, Nathaniel Rothschild, since at least 1879 but Barings recommended the avenue of an IPO over a straightforward sale to a new buyer. Besides Barings, the firm Glyn, Mills & Company, a private bank that had conducted other brewery IPOs of its own, operated in a secondary capacity here, that of registration and transfer agent for the new Guinness shares.

To buy the brewery, a valuation had to be conducted. It arrived at a value of £6 million. An earlier estimate came to £5 million, but Sir E.C. Guinness insisted on £6 million. Still, the company’s premises were valued at ‘only’ about £2.5 million while goodwill, representing the excess over the tangible value of the firm’s assets, was set at £3.5 million. At this price, the purchase of the brewery would be done at a valuation a little over thirteen times the average net profit of the firm over the prior five years, which was £452,294 per annum.

More than a single class of securities was offered by the company and Barings. Instead, there were ordinary shares, preference shares, and a bond. The safest security, the secured bonds, or debentures, of which £1.5 million were issued, offered a 5% rate to investors. These bonds could be redeemed by the brewer in twenty years at a price of 110% of face value.

Meanwhile, the preference shares, of which £2.0 million were issued, offered a 6% dividend and the riskiest security, the ordinary shares, of which £2.5 million was offered, stood a chance to deliver a 14% dividend to investors. The ratio of ordinary to preferred shares here was quite typical of brewery IPOs of the time and debenture offerings for breweries would become more common in this wave of brewery capital raising too.

The ordinary shares were priced at £10 apiece, as outlined in the October 21, 1886 prospectus distributed to interested investors. The amount invested had to be ‘paid-in’ over a few months, with the final installment due by February 8, 1887. Sir Edward Cecil Guinness would retain ownership of £800,000 of the ordinary shares, which he agreed to hold for at least five years. Still, the family would stand to receive over £5.2 million net of these retained shares. Beyond these, Barings kept many shares for itself and offered many to its partner firms. Thus, only about 25% of the Guinness shares were sold to the general public by Barings.

Subscription Books Open

Whatever its successes, there were some risks to investing in Guinness. One was mostly political; the company was based in Ireland which was campaigning for home rule, a cause supported by the Liberal Party leader William Ewart Gladstone, and many in Ireland in favor of home rule were also protectionist, so trade barriers could become a problem. There was also a social factor, beer consumption was declining as the temperance movement was getting underway. There would soon be a precipitous decline in the number of pubs. Further, the old historical practice of doctors prescribing Guinness to their patients was already in decline.

When the time came, orders were mailed in by investors before the subscription books opened on October 25, 1886. The firm ran out of printed prospectuses, even though there was a fee to receive one. The subscription books closed after just three hours, rather than the advertised thirty-six hours. Demand was clearly robust.

There would have been more orders if the subscription books had stayed open. Dubliners accused Barings and the company of disadvantaging them in terms of the notice given and place for delivering their subscriptions. Police had to be positioned near Barings’ office in the city to check the fury. That said, things were not necessarily proceeding orderly in London either where crowds broke one of the front doors to Barings’ offices at Bishopsgate Street. When the books were closed, the subscriptions came to £127 million. Despite 5% of the subscribed amount being due upon application, some investors had placed orders for far more of the shares than they could afford, betting correctly that their orders would be reduced as the offering became oversubscribed.

The London Evening Standard reported “the fact that the applications for the Shares of Messrs. Guinness and Co. reached the nominal total of about a hundred millions is enough to make us all stare”. The Spectator said “the scene which accompanied the sale of the Guinness brewery on Monday, is sufficient to show that most of the conditions for a ‘mania’ exist”. This was a warning and not adulation by The Spectator. More approvingly, the industry publication The Brewers’ Guardian declared “the marvellous subscription list for Guinness & Co.’s shares is the most remarkable and telling answer yet given to the propaganda of the teetotal party”.

Results

The demand carried over into the secondary market. Within two weeks, the share price rose to £16, delivering a 60% nearly-immediate return to those who received allotments in the IPO. It seems that rather than be elevated, a £6 million valuation was well below what the market would have accepted. Barings was permitted to take one-third of the issuance for itself, delivering it a large profit of its own.

The success of the Guinness IPO accelerated the wave of capital raising for breweries that had already been underway. Some eighty-six more firms in the industry would raise money from the public by November 1890. A further wave of brewery capital raising arrived in the mid-1890s. Brewery shares performed well in the 1890s and, between 1878 and 1913, Guinness ordinary shares were among the best performing in the industry. Although, after the 19th century came to an end, brewery shares generally performed worse than the London market overall, reflecting the real risks the industry faced.

Lesson

There were very few listed breweries in the UK prior to 1880. There were a few more five years later. However, the outcome of Guinness’s IPO in 1886 encouraged many of its peers to raise capital in the London market too. The Guinness IPO may not have caused the frenzy by itself; after all, the changes underway in the industry already created an incentive on the part of companies to court investors. But incentive is not enough. Fortunately for brewers and their bankers though, the Guinness experience made clear that market demand existed in ample quantity; a new market can be opened up by one successful issuance.

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