The hedging loss from Mitchells & Butlers's (M&B) postponed property joint venture (JV) with Robert Tchenguiz's R20 has increased to £200m before tax, M&B has revealed.
M&B, which runs around 2,000 managed pubs, stated the mark-to-market loss on its share of the hedging arrangements it took out against the debt associated with its postponed joint venture had risen to £140m post-tax.
The statement by M&B came after a report in The Sunday Times said that the company was facing a much higher liability from the postponed property deal than the £60m post-tax loss it previously indicated in July.
M&B said that deficit would be treated as an exceptional loss in its accounts to the end of September. It added that itself and R20, Tchenguiz's investment vehicle, had been in final negotiations with banks to finance the postponed transaction, which would have seen approximately 1,300 of M&B's pubs and £240m of rent placed in a property JV worth £4.5bn. It said it was unlikely that the JV would be achieved until debt markets have improved.
However, M&B said that it continued to believe that substantial value could be released to shareholders through a property spin-off and that it was still in talks with banks to implement a transaction once the debt markets have stabilised.
In a statement, M&B said the £140m post-tax deficit "reflects the combined effect since July, of reduced long-term interest rates and higher long-term inflation expectations brought about by the recent instability of the debt market."
What the analysts say
Douglas Jack, of Panmure Gordon
"Having failed to raise the debt for its operating company/property company, M&B then failed to close its related hedging position. As a consequence, it has a mark-to-market loss of £140m post-tax. Equally worryingly, management is still trying to wrestle with the debt markets to create its OpCo/PropCo structure, a transaction that would further erode the financial stability of the company."
Paul Hickman, at KBC Peel Hunt
"The problem with management's position is that the market does not believe the prospect of a property JV is viable in the short or medium term. Management's credibility, in terms of the deal and the hedging attached, is now linked to this, and is suffering. The action that could be taken to reassure investors - a return of cash to shareholders - is effectively put out of court by the commitment to the JV."
Mark Brumby, of Blue Oar Securities
"Whilst £200m could refurbish a lot of pubs, this is a non-cash loss as it has not yet been realised. The hedge (effectively a redundant or at least dormant insurance policy) is expected to be used in future transactions but not for a while. It is not clear if the hedge has a re-sale value - possibly not in these markets. We believe that, though it is a premier operator, M&B is not finding trading easy in key areas, like its Vintage Inns pubs."