Charity: Questions remain over M&B hedge

It's been a pretty disastrous 12 months for Mitchells & Butlers (M&B).

Despite posting extremely solid mid-winter trading figures, it faces the prospect of handing over its independence.

Punch Taverns stands in pole position having tabled a plan to merge the two companies while paying a £175m sweetener to M&B shareholders.

The departure of finance director Karim Naffah last week came as the company finally closed two disastrous hedge positions and booked a huge £391m pre-tax loss.

There was no disguising the anger among M&B's smaller shareholders at a fraught annual general meeting last Thursday. Chairman Roger Carr was on the receiving end of possibly the roughest tongue-lashing of his career.

It was clear that the smaller shareholders wanted chief executive Tim Clarke to stay, but thought Carr should go the same way Naffah had.

Despite an hour of tough questioning, shareholders didn't really get answers to some key questions.

City observers believe it is common practice for hedges to be made contingent on the go-ahead for the release of money. Later on, in a meeting with journalists, chief executive Tim Clarke explained that the cost of this was "significant"​ and the market for inflation hedges lacked liquidity.

A complicating factor was that the hedges were arranged more quickly than the M&B board expected, leaving a vital two-week gap between having them in place and the finance being withdrawn as the credit crunch arrived.

The question remains - how significant was the cost of making the hedge contingent?

It's a figure that, no doubt, will look paltry compared to the eventual losses. It's also been suggested that Robert Tchnenguiz's parallel hedge was taken in the form of options rather than futures.

Blank cheque​

This would leave his losses capped while M&B was handing over a blank cheque. Was Tchenguiz's advice better than M&B's? One other widely-circulating rumour is that Tchenguiz closed his hedges a long time before M&B.

When I asked Tim Clarke about this last Thursday he insisted this was a matter for Tchenguiz's R20. Well, M&B was in partnership with R20 from the start of this expedition.

If R20 bailed out at some time - or still has his hedges in position - surely this is a matter M&B shareholders should be briefed on. The closing of the hedge position will also still strike many observers as way too tardy.

It's an irony that it's taken the capping of the potentially limitless losses of the hedges to put the company in play - and restore the share price a little. M&B strategy in the past eight months has been driven by the 60% of shareholders who want the release of quick value - the figure is Carr's own estimate.

The anguish of smaller shareholders who like the long-term strategy of organic growth was palpable at the AGM.

The Punch merger proposal is much more about buying and organisational synergies. As such, it's unlikely to find favour with those investors, such as Tchenguiz, who want to extract the property value.

He is more likely to side with possible venture capital bidders who would be keen to extract value in an immediate fashion.