Collyer: M&B joint venture an option

Mitchells & Butlers (M&B) could follow the example of Tesco by creating a joint venture property company that crystallises property value but avoids a full conversion to a real estate investment trust (Reit), according to Deutsche Bank analyst Geof Collyer.

A move by M&B to copy the Tesco model would release as much as £950m - 220p a share - to hand back to shareholders, he said.

Tesco banked £570m of cash last week after injecting sites worth £366m at book value into a joint venture with British Land. Both parties put in £80m of equity each and the properties were revalued at £650m and leased back to Tesco at an initial yield of 4.46%. The deal was broadly profit-and-loss neutral with Tesco planning to return the £570m to shareholders.

Collyer said M&B could sell 20% of its estate, worth £625m at 1999 book value, into a joint venture like the Tesco one and raise £1.1bn less the equity - around £137m - it injected into the joint venture.

He added: "This would leave it with over £950m to hand back to shareholders. This is equivalent to about 30% of the group's current market capitalisation.

"This would leave M&B with scope for further asset revaluations - notably from the Whitbread pub conversions - and retain control over an estate that would be 70% freehold, 30% leasehold with an option to buy back 20% in 10 years' time."

Collyer noted the Tesco deal "seems to be a way of crystallising current property values while retaining at least 50% ownership and control over the properties versus a maximum of 10% ownership under a Reit structure". He added: "Control has been one of the key neg-

atives for the pub companies when considering Reits."

'entrepreneurial' Franchisees required at 17 m&B pubs

Mitchells & Butlers is to transfer 17 more managed pubs out to franchise lease operations. M&B says it hopes to attract "entrepreneurial" operators to develop the pub businesses located in prime sites across the country. The company, which runs 2,000 managed pubs, first ventured into leasing three years ago when it identified a number of sites that it felt could develop better under private entrepreneurial hands.

The franchise deal involves 10-year leases with licensees paying normal rent on top of a fee based on business turnover. In return, hosts receive a full business support package and are offered what M&B describes as "free-trade drinks prices" thanks to its central purchasing power.

M&B says the deal is on offer to experienced and novice licensees who will receive full training and company support.

"The pubs have an established trading history of higher-than-average sales. With support and training from experienced operations managers as well as established business formats, the franchise lease provides an excellent platform for any new operator to build on," said Simon Chaplin, director of Christie+Co, which is marketing the pubs. The 17 pubs on offer are located as far apart as Perth in Scotland to Winchester, Hampshire, with turnovers between £350,000 and £650,000.