Lovering's brave new vision for M&B

Managed company Mitchells & Butlers unveiled a new business strategy last week. The PMA Team looks at the plan.

Welcome to the brave new world of Mitchells & Butlers (M&B). Last week, the results of a quick-fire, 55-day review of strategy at the managed behemoth was unveiled to analysts and investors.

New chairman John Lovering, the choice of activist investors Joe Lewis, John Magnier and JP McManus, was firmly in the box seat at the analysts' presentation, signalling that a new era of firm chairmanship and active non-executive directors had begun.

You could smell the testosterone down the phone line as Lovering set about outlining the new vision in a muscular and at times bruising style — City analysts taking part in a conference call found themselves subject to verbal slap-downs if they failed to take the point (one was told off for referring to M&B's pubs as, well, pubs: "You keep talking about pubs — I want you to talk about licensed catering outlets," Lovering told the analyst).

The new strategy was two thirds carried over from chief executive Adam Fowle's January presentation, which had placed a new emphasis on six drive brands. But there was a new sub-text from Lovering — operationally, M&B had been too cosy and conservative in the past. Lovering has a background in private equity — and the implicit message was that M&B would benefit from a private equity-style focus on value creation measured against stricter internal targets.

As part and parcel of this, the company's executives would be wrenched away from a reward system centred on "continuity and security" rather than "profit maximisation".

Mention was made of too much M&B emphasis on a "big generous defined benefits pension fund" for executives — "managers value their pensions more highly than their share options".

Sacred cows​

Lovering has a number of sacred cows lined up for slaughter as he seeks to accelerate M&B's evolution as a food-led operator. Brands incapable of producing £10m of EBITDA, getting to 100 sites or meeting strict return-on-investment targets would be up for sale.

More generally, M&B had far too many brands. The company, argued Lovering, has been creating brands to fill its 2,000 freehold pubs. This approach was wrong because it had mitigated against expanding the best brands across a wider range of property tenure types in the interests of fulfilling their potential and maximising shareholder returns.

Sub-scale wet-led brands and pubs were now on the block — and there would be an unsentimental approach. "If somebody offers us one pound more than an asset is worth, we'll accept that offer," he said.

Nevertheless, Lovering built in some wriggle room on site retention. "I'm more interested in making money than being consistent." He did indicate that between 10% and 15% of M&B's estate — 200 to 300 wet-led pubs — are likely to be sold to fund investment in growing key food-led brands. Lovering didn't disagree when an analyst suggested this would release around £350m to £400m of capital for expansion.

Key brands​

The plan involves expanding the six growth brands — Harvester, Toby Carvery, Crown Carveries, Vintage Inns, Sizzling Pub Company and Premium Country Dining — from 900 sites to 1,900 sites.

What was initially far less clear was the timescale that Lovering has in mind to complete the roll-out plan. Lovering was less than keen to pin himself to a timetable.

One analyst suggested that it would take at least 10 years — not a ridiculous timescale given that this would require a demanding 100 openings a year.

Lovering dismissed the suggestion: "I'm going to be old bones by then." Eventually he told investors he'd like to double the six key drive brands in less than five years. "We're striving to move considerably faster than that," he said. Here, of course, is a big challenge for M&B — and one with new risks.

The new strategy involves opening brands such as Harvester and Toby Carvery in retail parks and shopping centres, where the company will need to break with tradition and sign up for many more leaseholds.

It's not completely new territory because there are 20 Harvesters in retail parks already.

However, the company will now have to test itself against a 25% return-on-cash target in this environment — it has an 11% return on investment for freehold sites with limited experience. (Here's how Lovering acknowledged the point: "Our historical freehold property base (has) limited brand expansion and insulated us from the disciplines and learnings that flow from the economics of retail locations.")

At this stage, too, it's property pipeline will be limited in the extreme — it also has to recruit a new property director — and the move will herald a new era of competition for the best sites from the likes of The Restaurant Group and Pizza Hut.

Toby Carvery​

Edgier still is a plan to open smaller footprint Harvesters and Toby Carveries in high-street locations.

One analyst suggested that Toby Carvery was a "little 1980s" for the high street.

Lovering made it clear that the high-street plan was more of a slow burn, with trialling only starting towards the end of 2010.

"If we're really brave we'll mix it on the high street," Lovering said. There is one aspect of the plan, though, that is truly outside M&B's control. It requires the sale of its wet-led, price-sensitive pubs to create cash for reinvestment.

The failure to sell Alex, the German brand that M&B has wanted to sell for several years, shows just how hard it can be to attract buyers prepared to meet M&B's price expectations.

It's clearly a less than great time to be selling wet-led pubs.

But it's difficult to know whether M&B's new brand criteria means that quality brands such as Browns and All Bar One are now in the departure lounge — private equity interest could well be piqued here.

The over-riding point, though, is that it's impossible for anyone to know how quickly and how successfully M&B can complete its planned clear out. M&B can't be faulted for the ambition of its new plan; indeed, there are parts of this new world plan that truly are brave.

Creating an internal market​

M&B chairman John Lovering said the company would create an internal market whereby the operating company would be measured on return achieved against its freehold property assets.

He insisted, however, that the company's freehold property would not be moved into a new legal entity — there would be no property company/operating company division as proposed when Robert Tchenguiz's R20 held a 23% stake in the company.

He said: "It just creates fees for lawyers and everyone would assume it was the forerunner to something more radical.

"We don't need to move the property into a new legal entity to get the management behaviour we want."

No-cost review​

M&B chairman John Lovering told analysts that nothing had been spent on its latest review — a reference to the £12m that was spent on a review in spring 2008. He said the review had been done internally at no cost rather "than enrich our friends in the advisory industry". He did, however, acknowledge that non-executive directors would be better paid than in the past. "We can't expect people (to do the job) for love." Lovering himself will be paid £350,000 in shares per annum — the previous chairman earned £200,000. The Guardian claimed that non-executives would see current pay of £40,000 per annum double.

What the analysts say: ​

Simon French, Panmure Gordon:​ "While the conclusions announced offer encouraging long-term growth potential, this will take time to achieve and no little disruption with a number of senior management positions being recruited for."

James Dawson, Charles Stanley:​ "We consider the strategic review statement released today as being rather lack lustre. While the release outlines the types of points expected, the timescale for such developments remains uncertain and there are clearer strategies elsewher