Mark Stretton analyses the possibility of Scottish & Newcastle Retail merging with the Mitchells & Butlers chain to create one business.
Utterly compelling, mouth-watering, beautiful, incredibly powerful, the dream deal: these are just some of the superlatives used to describe the prospect of somebody coming along and putting the UK's two largest managed pub businesses together.
The notion of a Mitchells & Butlers-Scottish & Newcastle Retail combo may seem pie-in-the-sky but there are plenty of reasons why a company with very deep pockets might look to lead the consolidation of Britain's managed pub sector in this way.
Merger talk was kicked off last week when Britain's biggest brewer Scottish & Newcastle (S&N) announced it was selling its entire 1,450-strong managed pub business, with a price tag in excess of £2.3bn.
At the same time there has been plenty of interest in the 2,050-strong Mitchells & Butlers (M&B), the pub arm of Six Continents (6C) that was recently floated-off on the stock market.
"It's obviously the play," said one source close to the situation. "You need someone with plenty of money. It is also a case of everything falling into place at the right time."
The two pub estates contain arguably some of the finest pub assets in the country. Any buyer could raise a vast amount of cash selling the freeholds and leasing the properties back. "This is a beautiful deal for a group with the ability to do it," said Neil Gillis, managing director of Greene King Pub Company.
A report from analysts at WestLB Panmure last September seemed to agree: "The M&B-S&N Retail pub merger is too strategically compelling to die. The combined estate would be one of the largest, and arguably one of the best quality, in the UK."
There are only a handful of companies that would be able to do either deal, let alone both.
Private equity group BC Partners and Japanese bank Nomura have been linked to both deals. BC narrowly missed out in the auction for Gala Bingo and had a £2.8bn bid for M&B rejected by the 6C management shortly before the split.
Nomura has also been named and having made big profits through the tenanted pub sector with Inn Partnership, Unique and Voyager, it may fancy a run at managed houses.
Looking into the crystal ball, if everything were to fall into place at the right time for a merger, it would go something like this: first buy S&N Retail.
As soon as S&N Retail is sold, shares in M&B will probably fall. At the moment M&B shares are held up at 217p because the City thinks it will be bought.
If somebody splashes out £2.3bn to £2.5bn on S&N, the expectation that there is another buyer willing to pay £3bn for M&B will fade.
If M&B shares do drop, to about 180p, the company will be valued at around £2.3bn. A buyer would sweeten shareholders by offering about £2.8bn - a premium of £500m.
"Nobody is going to pay much more than £2.8bn or £2.9bn for M&B because it's not worth any more," said one industry insider, although analysts tend to think the true value is nearer £3.4bn.
But why do it? Basically the motivation is the same as any other deal - there is a lot of money to be made. WestLB estimates that putting the two together would automatically save £80m each year - that equates to about £23,000 per pub per year. This is a combination of putting two head offices into one, trimming staff, better buying arrangements with suppliers and so on.
The S&N Retail deal will be dealt with first. The management might have a part to play if the buyer is a venture capitalist and not another pub company. Executive chairman Bob Ivell has openly shared his desire to remain with the business and has the track record to boot.
The 630-strong Laurel Pub Company, led by chief executive Ian Payne, is also exploring a deal. Laurel recently completed a sale-and-leaseback of 280 pubs with Nomura and the two groups may look to fortify their relationship with an outright acquisition.
M&B is probably out of the running to buy S&N Retail because the brewer wants cash to expand its global beer business. M&B would probably propose a mostly paper-based deal.
The M&B-S&N merger speculation is a situation revisited. M&B boss Tim Clarke approached S&N last year, wanting to merge the two businesses together. The talks stalled over beer arrangements as S&N wanted to secure long-term supply deals for its brands, which include the "JFK" trio of John Smith's, Foster's and Kronenbourg 1664.
This time around, S&N must have thought long and hard about a pub consolidation strategy before announcing last week that its future was as a focused global brewer. Apart from the money to be made for shareholders, there is another strong argument for S&N buying M&B.
The lager categories in the M&B estate are dominated by Carling and Stella Artois. S&N could leverage Foster's and Kronenbourg into these pubs, with Foster's possibly ousting Carling as the number one standard lager in the UK.
The managed sector of the UK is primed for consolidation. Many companies, especially in the high street and leased market are struggling.
Putting S&N and M&B together might sound like fantasy and the combined cost of the two companies is between £5.4bn and £5.9bn - a mind-boggling amount of money by any standards.
But private equity groups are cold, calculating animals. There is vast money to made from making a play for both. Next year Enterprise Inns will merge with Unique Pub Company to create a 9,500-strong business - few would have predicted the tenanted and leased sector could reach such scale.
Aging British boxer Frank Bruno recently derided the younger wannabe Audley Harrison, saying that he was "in the right sort of market to be picked like an orange". The same could be said of M&B and S&N Retail.
Brands: Scottish & Newcastle
- Bar 38: style bar concept
- Baja Beach Club: late-night entertainment
- Chef & Brewer: premium adult dining
- Henry's Bar & Café: city café-bar
- John Barras: community local
- Norwegian Blue: test restaurant-bar brand
- Premier Lodge: budget accommodation
- The Orchard Pub Company: suburban food pub
- T&J Bernard: town centre local
- Country Carvery: adult dining
- Miller's Kitchen: family dining
- Steak & Ale: traditional food pub>
Brands: Mitchells & Butlers
- Alex: German brasseries
- All Bar One: city wine bar
- Arena: community pub
- Brown's: premium bar-restaurant
- Edwards: style bar with food
- Ember Inns: premium community pub
- Flares: 1970s disco club
- Goose: M&B's answer to Wetherspoon
- Harvester: food pub
- Hollywood Bowl: bowling alley with bar
- Innkeeper's Lodge: budget accommodation
- O'Neill's: Irish bar concept
- Scream: student pub
- Sizzling Pub Company: local steak pub
- Toby Carvery: pub-restaurant
- Vintage Inns: premium adult dining.
S&N/M&B estate breakdown