Will Tchenguiz do another Laurel on M&B?

The Iranian-born investor's forceful business approach over M&B is focused on the short term, says The PMA Team

A few years back, Mitchells & Butlers (M&B) gave very short shrift to Robert Tchenguiz who wanted to take the company private. He offered M&B shareholders 550p a share, an offer dismissed by the M&B board on the basis that it failed to take account of the company's prospects.

After the offer had been dismissed, M&B's shares sank back to below 500p. Tchenguiz, not unnaturally, began to vacuum up M&B shares.

At the time, a Tchenguiz colleague was talking off the record about his boss's determination to bring M&B to heel. Suffice to say, the M&B story of the past couple of years has been largely about the determination of Tchenguiz to bend M&B to his will.

Last week, Tchenguiz completed the two-year arc by topping up his M&B holding to just short of 30% by adding another large tranche of shares at the current knockdown price — M&B shares were trading at around 234p last week.

Since he began buying large numbers of M&B shares a couple of years ago, Tchenguiz has been joined on the share register by a large number of buyers who are motivated by the prospect of disgorging M&B's considerable freehold property estate.

The long and the short of this is that Tchenguiz, to all intents and purposes, began bossing M&B strategy around 14 months ago.

For the period since, M&B has pretty much been prepared to do whatever it is that Tchenguiz, who speaks on behalf of around 60% of the share register when his hedge fund property chums are taken into account, feels would unlock its huge property value.

Last summer, M&B strategy consisted of the operating company/property company split that eventually cost the company just short of £400m when it had to close ill-conceived interest rate and inflation swaps it had taken out.

In the late autumn and again now, it's the route of the real estate investment trust (Reit) that's being explored. Last month, M&B admitted two Tchenguiz lieutenants, Aaron Brown and Tim Smalley, to the board as non-executive directors in what amounted to a symbolic indication of where the power now lies.

M&B said that it would benefit from their property expertise. The truth is that M&B's largest shareholder demanded two places so he could more closely monitor the course of action he has decided upon.

In all of this, it's hard not to feel sorry for M&B's management, which has been having to perform extraordinary volte-faces to justify changes of tack. For years, for example, owning freeholds was vital to the long-term future of the business.

Now, says chief executive Tim Clarke, the company does not require the "feather-bedding" of an operating company owning its freeholds.

There is, of course, a lot at stake here — the future of the UK's greatest managed company. M&B is already like the fleet's flagship, listing slightly after self-inflicted damage from a risk-laden battle strategy. The near-£400m losses from the hedge debacle could have been spent on buying a couple of hundred more super-pubs, of which it already owns 2,000 of the estimated 4,000 in the UK.

Robert Tchenguiz has been characterised as a gambler by Alchemy Partner boss Jon Moulton. Punch chief executive Giles Thorley has described M&B's terrible losses as "gambling debts". Last week, Fuller's chairman Michael Turner felt concerned enough about the future of M&B to call Tchenguiz's plan for M&B "not good for consumers, not good for the industry".

The concern here centres around a fundamental question: is Robert Tchenguiz a good thing for the pub industry? Those who think not, and there are plenty of them, point to Laurel Pub Company. Very few pub companies that run an entirely or almost entirely leasehold pub estate, which would be the position of the M&B operating company, have been successful in the long term.

Laurel Pub Company was turned into an entirely leasehold pub company after Tchenguiz removed the 100 or so freeholds into separate companies. It's clear that the rental obligations imposed on Laurel was one of the reasons it struggled to have enough cash to re-invest.

Some wonder whether his post-administration companies will soon start to create a fresh tail because of their RPI-linked rental obligations to the external and "in-house" landlords. Anyone who has watched Laurel's slide into administration has a right to worry about the future of M&B.

So far, Robert Tchenguiz's foray into managed pubs has been pretty disastrous. All the casual observer can do is hope that common sense can prevail at M&B and its strategy is not entirely dictated by the desire to extract as much juice from the freehold property estate now — with limited consideration for the long-term prospects of this great company.