City analyst slams Mitchells & Butlers

A senior City analyst has claimed a question mark hangs over Mitchells & Butlers management's credibility after the halting of the joint venture property deal with Robert Tchenguiz.

Douglas Jack, of Panmure Gordon, has claimed the company is "in a mess" not least because M&B has incurred around £80m of pre-tax hedging deficit preparing for the deal.

Jack said: "What is meant by saying that the deal is unlikely to be concluded until `the debt markets have improved?". "Does this mean `until interest rates fall to advantageous levels". ​

"If so, the deal is in trouble because interest rates and bond yields are still increasing.

"M&B claims that the PropCo/OpCo deal will `preserve the integrity of a proven business model, yet the deal will leave M&B opCo overleveraged (on under 2x cash fixed charge cover), overvalued (due to the cost and earnings dilution of the transaction) and overhung as risk averse FTSE trackers and possibly Robert Tchenguiz sell.

"This scenario could drive the shares below 600p even if the deal proceeded on sub-6% cost of debt.

"Alternatively, if the deal can be avoided, a share price of 675p would realign M&B´s valuation with its current freehold residential pub peer group.

"Coincidently, this is also our new target price, reflecting optimism that the proposed value destructive PropCo/OpCo deal will now not take place.

"Generously, this target excludes £60m of post-tax hedging deficit costs that management has incurred preparing for the JV deal

"The deal, the rational for the deal, entering a hedge before raising the related debt all leave the credibility of management in question. It therefore suggests that the risk profile of this company is even worse than we have suggested and that the downside risk to its rating is even greater."