City diary special: M&B

Those hedge losses in layman's terms

Last week's belated closure of the Mitchells & Butlers (M&B) hedge position - at a pre-tax cost of almost £400m - had several City types spitting bullets.

Although the conference call with analysts was a polite affair,

the comments flying around afterwards were decidedly less so.

"My 12-year-old son was saying close the hedge in the autumn," said one.

The M&B hedge has been described as an insurance policy against the operating company defaulting. At a cost of £400m it seems like very expensive insurance, doesn't it? Here's one explanation a City analyst provided to City Diary.

"It reflects the level of risk of the operating company/property company model. You're talking bad numbers, reflecting the risk of going down the route of a mad strategy. You have to have a level of insurance that reflects the level of your madness."

Funny how these analysts are much easier to understand when they're talking rather than scribbling.

Carr shaken and stirred by shareholders

M&B shareholders were determined not to mince their words at the company's annual general meeting last week. One shareholder said the board had "punted the company on the 4.30 at Epsom". Another shareholder told chairman Roger Carr that his "emollient words were almost insulting" to the shareholders. One other shareholder in the large audience at the Queen Elizabeth Conference Centre said that departed finance director Karim Naffah, left, had been made a scapegoat for the hedge loss, adding: "What you have said isn't good enough. This happened on the board's watch." Carr, it has to be said, looked more than a little shaken.

Partying on in splendid isolation

One unanswered question last week was whether M&B's would-be joint venture partner Robert Tchenguiz had closed his hedges, taken out last summer in parallel with M&B. The Guardian suggested that Tchenguiz's encouragement of M&B to consider other property deals was an indication that he still had them in place. Two other sources believe he closed them, one of them suggesting he made the move last November. If Tchenguiz did close in November, his losses would stand at a much more modest figure, possibly around £100m. And if this is the case, you do wonder why

M&B didn't follow suit at the same time. When the

host of a party leaves early, the party is normally

over, isn't it?

Still a smooth operator

It is worth stressing the operational strength of M&B. Mark Brumby, of Blue Oar Securities, who was at the top of his form last week, put it well: "It is critically important to distinguish between the strategic and the operational. Strategically, the parties involved have put us where we are, but operationally, M&B is a fantastic company. It has, thankfully, not been stripped of its assets, retains the capacity to perform well at the operating level and we believe the shares are a buy."

Led down garden path?

Was the M&B board craven, though, in allowing Robert Tchenguiz, right, to lead it down the property joint venture deal? One senior pub company figure, who would sooner part with his fingernails than sell his freeholds, has very forthright views on the subject. On two separate occasions, once in September last year and once in December, the pub company chief has given City Diary the following succinct view: "I'd have told Robbie to clear off."

Way off Whitbread mark

One little-spotted fact emerging from the Mitchells & Butlers conference call last week related to the sales figures at the 239 Whitbread pubs it acquired in August 2006. M&B promised a 30% sales uplift after three years. The achieved figure dropped to around 20% at the end of the very wet summer. Now the figure has dropped to 17% - a full 18 months after the deal. There's time to get to the 30% bench mark, obviously, but M&B is a long way off at the moment. "It's only just over half the promised figure," said one analyst. Tim Clarke said: "They slipped a little in the run-up to Christmas with very strong trading over Christmas and in January."

The pattern was a strong initial uplift and a strong subsequent build, he added.

Dim view of merger murmurs

At least one City analyst initially took a very jaundiced view of talk about M&B being bought out - and another strategic review being launched. Geof Collyer, of Deutsche Bank, said: "We will find out the results of the (third) strategic review at the interims on 20 May. However, it is difficult to see what options lie open to M&B while the debt markets remain closed. "Apart from Whitbread, we still believe the only other pub group that is likely to satisfy M&B's "consolidation" desire is Punch, which is now on a 40% P/E discount - hardly suitable for a nil-premium merger." He was right, subject to a £175m sweetener.

Dusting off plan A

Another City analyst would like M&B to dust off Plan A. Richard Carter, of Numis Securities, says: "In the absence of a property transaction, the board says that it will undertake a review of strategic options for value creation. We would like to see M&B get back to its original plan of securitising the acquired Whitbread pubs post-conversion and returning the cash to shareholders."

Clarke: talks continue

As M&B was preparing to chop down its hedges, activist investor Robert Tchenguiz was buying an even bigger stake in the company through contracts-for-difference. What's he up to? Clarke told analysts that the company "continued to be in dialogue with all its major investors" but "wasn't at liberty" to discuss the nature of the discussion. One analyst had an earthy summary of the move: "It's s*** or bust."

Approaching 50 not out

Operationally, a milestone is fast approaching at M&B, which is very close to opening its 50th "premium country dining" venue, the gastro-concept it is expanding in partnership with entrepreneurs Paul Salisbury and Paul Hales. City Diary heard that the Sea Horse near Guildford might well be the 50th conversion. Not true, through, says M&B publicity supremo Kathryn Holland - it's only the 48th or 49th. Nevertheless, the half-century mark is within touching distance. Not bad in four or five years.

Polite notice of rude health

Good news, also, on how well the pub food market is performing through the first winter of the smoking ban. Clarke told analysts that the market was in "rude good health" with January trading very satisfactory. M&B's mid-market brands Vintage, Harvester and Toby Carvery had seen "quite a powerful bounceback" after the very successful launch of new menus at the start of November. Sizzling Pub Company, Pub & Carvery and Cornerstone "remain remarkably buoyant". The impact of the smoking ban was, however, noticeable in the pubs and bars, locals and high-street segments of the business.

Market share speaks volumes

One interesting footnote on beer prices for those of us not in the know on how these things work. One analyst asked how the annual increase in beer prices would affect M&B. Clarke told them this was the annual increase to the wholesale price list which "doesn't affect us". "We have long-term contracts with brewers," he added. Meanwhile, Clarke said, the performance of the pub market had become highly polarised during the winter. Beer volumes across the pub sector were down by 9% in the last quarter of 2007 while M&B's beer volumes were down by just 1%. M&B's long-term policy of grabbing market share is currently showing "accelerating" returns.

One naked take on the truth

The BBC's business editor Robert Peston is always good value. Here's his take on M&B's hedge. "Unfortunately

for M&B and its shareholders, the hedge was already in place - but it was an orphan and it was naked, unable to do what it was supp