Will Tchenguiz come calling again at M&B?

Mitchells & Butlers (M&B) shareholders have had an excellent six months. Thanks must go in no small part to Iranian property tycoon Robert Tchenguiz , who has prompted a fundamental re-rating of the company's share price. Prior to Tchenguiz's first expression of interest in taking the company private, M&B's shares were languishing at 413p. A consortium led by Tchenguiz eventually offered M&B shareholders 550p.

M&B management gave the offer short shrift, insisting that it failed to recognise the company's inherent value and potential.

For a few weeks now, M&B shares have traded above the 550p value Tchenguiz ascribed to them. Rebuffed by the M&B board, Tchenguiz took the opportunity to buy as much as 12% of the company's total shares at a discount to the 550p he thought they were worth.

Up to now, then, everyone has been a winner.

M&B management has already lifted shares to a level that's higher than Tchenguiz's offer, proving their under-valuation point within three months.

Tchenguiz is sitting on a substantial paper profit on his investment in the company and ordinary shareholders have also seen a substantial rise in their stakes. At the time M&B dismissed his offer with a rapidity bordering on disdain, there were mutterings from the Tchenguiz camp about M&B management not properly canvassing the views of its smaller shareholders. Nevertheless, it seems clear that Tchenguiz was trying to buy M&B on the cheap. Private equity players like Robert Tchenguiz make money by spotting a gap in the real value of assets and a current depressed valuation.

Sure enough, last week M&B revealed its freehold pub estate is now worth £5.5bn, up from £3.85bn under the last valuation in 2003.

Put simply, M&B's operational out-performance within the past three years has increased the value of its pubs by 40%, nearly twice the Christie+Co benchmark pub property index figure of 22%. The increased value of M&B's pubs will allow payment to shareholders of a special dividend of £1 a share. However, one burning question remains: will Tchenguiz return to make a fresh bid for M&B when takeover rules allow in November?

No-one believes that Robert Tchenguiz has a passion to run pubs - he is not bursting to take over M&B so that he can introduce radical retail innovations. It's unlikely he has spotted a better way to run a carvery.

Rather, Tchenguiz likes doing deals and making money. It could well be that he still sees the opportunity to apply all manner of sophisticated financial engineering at M&B to squeeze out value that makes the company worth more than its current 560p-a-share rating. One industry analyst, Paul Hickman of KBC Peel Hunt, claimed last week that a sale-and-leaseback of the M&B estate would release value equivalent to 720p a share.

Some industry observers have suggested to me that the rumoured trading difficulties at his managed operation, Laurel Pub Company may have reduced his appetite for running pubs - double-digit sales shrinkage can have a dramatic impact on the bottom line in a leasehold estate.

But very few people have lost money in the past decade buying freehold pubs; I doubt whether Robert Tchenguiz has ever lost money buying freehold assets. Of six senior leisure industry analysts to whom I spoke last week, many believed that Tchenguiz would cash in his current M&B stake quite shortly - he is currently sitting on a paper profit of around £42m. Interestingly enough, all six believed that M&B has strengthened its position hugely since Tchenguiz's last approach in May. It has bought the pub assets it so badly needed to buy (Whitbread's 239 stand-alone pub restaurants) and refinanced in a way that demonstrates that huge value is being created by tip-top management.

If Robert Tchenguiz comes calling again, though, it's obvious that he has spotted unlocked value at M&B. Other shareholders will be faced with a fairly straightforward decision: to take an instant premium or wait and allow M&B management to release even greater value for them.