M&B eyes Punch's Spirit pubs

Mitchells & Butlers (M&B) has turned the tables on Punch Taverns by suggesting it buys its managed-pub division, Spirit.

The company is in talks with a number of private-equity investors about how investment could be used to fund a deal to buy Spirit. The move come after Punch Taverns withdrew a 50/50 merger proposal plus £175m sweetener for shareholders.

Under the original proposal a merger between Punch and M&B would have created a business worth £11bn and formed an estate of 10,400 pubs. The M&B takeover of Punch's managed division would add 856 pubs to the estate, including the Chef & Brewer brand and a large number of high-quality London pubs.

M&B said: "The board believes that significant value through enhanced sales and profitability can be created by integrating Punch's managed-pub business into Mitchells & Butlers operational and brand structure."

Punch Taverns said: "In line with its announcement last month, Punch has been exploring options with third parties including a combination of Spirit with M&B. Last week M&B sought clarification from Punch as to a potential combination. Punch continues with these talks and, if appropriate, will make a proposal to M&B."

Meanwhile, M&B chief executive Tim Clarke is under severe pressure from existing investors to release the company's property value as part of the on-going review into strategy.

According to the Sunday Telegraph, investors such as Iranian property magnate Robert Tchenguiz have made it "extremely clear" that they would move to remove management unless they seek to monetise the company's property portfolio.

The move is part of an array of different negotiations and avenues being explored at M&B. Three private-equity groups — Permira, Bain Capital and, working together, Blackstone and CVC Capital Partners — are understood to be interested in taking a stake of up to 29.9% in M&B.

At least one Punch investor, Marshall Wace, is reported to want Punch executives to focus on running its tenanted business. Punch tabled a full-blown merger proposal with M&B in January, but withdrew it last month after deciding it wasn't in the best interests of its shareholders.

It did, however, reveal that it had been approached by a "number of third parties in relation to possible transactions involving M&B".

M&B's strategic review comes after the company booked an almost £400m pre-tax loss on a hedge position it entered into ahead of an aborted property deal with Robert Tchenguiz's R20.

What the analysts say:

Paul Hickman, KBC Peel Hunt:

"At M&B we are forecasting £465m from 1,674 pubs, or an average of £277,000 per pub. Not only in size, but in operational quality, we regard the M&B estate as superior to that of Spirit. In addition, 296 pubs, or 34% of the August 2007 estate of M&B, are on short leaseholds, having been sold and leased back under its previous private-equity owners. As both M&B and Punch are trading on a prospective Ebitda multiple of 9x, any premium required to secure Punch shareholders' agreement is likely to be dilutive for M&B."

Douglas Jack, Panmure Gordon:

"M&B is now looking to use an equity injection to finance yet another acquisition and capex spree, even though its recent trading has not been great and its acquisition track record is even worse. The company is overgeared and overvalued. We believe shareholders can find better value elsewhere. Having blocked a merger with Punch Taverns on terms that would have been highly accretive to M&B shareholders, management is seeking an acquisition of Punch's managed-pub division (Spirit), financed by a private-equity cash injection, an outcome that is likely to be less attractive to M&B shareholders."

John Beaumont, Kaupthing:

"Strategically, we believe the move would make sense for Punch, because its core strength has been its leased/tenanted estate whereas its move into managed pubs has been a little disappointing from a results perspective. A deal could also include some pub swaps."

Geof Collyer, Deutsche Bank:

"M&B has made no secret of its desire to consolidate the market. We estimate there could be as much as £50m of synergies from combining the businesses — that was what Punch's bid was about."

Mark Brumby, Blue Oar Securities:

"The fur may well be flying for some time in regards to who said what and to whom, who initiated what and who's reactive as opposed to visionary, cash-strapped as opposed to flexible. However, what few disagree about is that combining the top-end managed pubs of Punch with those of M&B (whoever runs the combined business and whoever loses/keeps their jobs) is a reasonably sound idea."