City expects Punch/M&B merger to go through

Despite Mitchells & Butlers (M&B) claiming it is 'open to offers', City experts expect shareholders to okay Punch Taverns' merger proposal, tabled earlier this week.

"Punch's proposal is deliverable, which in this market is a distinct advantage," said one analyst who wished to remain anonymous.

"The question you've got to ask is can anyone, particularly private equity players, stump up £5bn in cash or cash and debt?"

The deal would be a 'win/win' for M&B shareholders, said another. "The 40 per cent of overlapping shareholders will see their [M&B] assets under strong management. That can't be said for the existing lot."

An M&B spokeswoman said the group was looking at several expressions of interest as part of its latest strategy review and would "consider the merits or otherwise" of these.

Punch's proposal sees a straight 50:50 merger of the two businesses, plus a cash sweetener for M&B shareholders of £175m. Finance experts believe the proposal could see more cash thrown onto the table to induce M&B shareholders to agree to the deal.

The City meanwhile remains critical of M&B's senior management for allowing the group to get into the current situation.

"The board hasn't covered itself in glory, but it will want to be in the shop window for as long as possible," said Blue Oar Securities' Mark Brumby. "M&B won't roll over though, and Punch may well have to raise the terms of its offer."

Deutsche Bank's Geof Collyer said: "M&B has been Punch's number one target and it looks like they'll get it for much lower than they thought they ever would. They would effectively be getting £5.4bn-worth of assets for £4.5bn in equity and debt."

Punch would be a "better balanced business" after a merger, Collyer said, "with 51 per cent of its profits coming from the managed side".

Shareholders might see some dilution of their earnings in the short term, but analysts concluded that looking further ahead operationally a merger would benefit all concerned.

Punch's plan to merge the two businesses followed M&B's catastrophic hedging losses and the resignation of finance director Karim Naffah.

If approved by shareholders and regulators, the new look company would see Punch boss Giles Thorley as chief executive, Punch finance director Phil Dutton as chief financial officer, M&B boss Tim Clarke as non-executive chairman and Punch's non-executive chairman Peter Cawdron as non-executive deputy chairman.

Other senior executives and board members would be "drawn from both companies reflecting the expertise within M&B and Punch's respective operations".

M&B plans to announce the results of its latest strategy review on May 20. It may have something to tell well before then.