M&B: The case for Joe Lewis

Everybody has a view on Bahaman billionaire Joe Lewis and his tenure on the share register of M&B. Last Thursday, at an Association of Licensed Multiple Retailers debate in Cambridge, former Novus chairman John Barnes was to be found among those not currently pulling their punches.
He described Lewis as having launched a “pirate attack on M&B”, adding, “It’s an absolute steal if it goes at a pirate price — it should be £4.30 a share not £2.30.”
The argument goes — one I’ve advanced — that Lewis has been a disruptive presence at M&B, causing the boardroom instability that now means he’s able to table a knock-down price for our finest managed pub operator. But what do we really know about Lewis’s views on events at M&B since his windfall capture of most of Robbie Tchenguiz’s stake in the company during the darkest days of Kaupthing’s unravelling in October 2008?
I spent some time at the end of last week trying to understand more about the Lewis perspective. Sources close to Lewis have already been quoted talking about how his investment in the company has given him no pleasure. He’s been a caste as a baleful, negative influence on the board and the company.
A different picture emerges from those close to him. They paint him as someone who loves licensed retail, an owner of 96 restaurants in the United States in his Tavistock Leisure business, where ebitda has grown significantly during his ownership. (And to be fair, the senior staff at Tavistock I met in Chicago in May were clearly enjoying life in his restaurant enterprise).
His close associates also speak fondly of the many M&B brands they love — Nicholson’s, Brown’s, All Bar One, Harvester and the Premium Country Dining gastro-venues. The Lewis vision for M&B is about operational performance, investment and growth and not - absolutely not - about selling brands to reduce debt.
There’s been a series of Lewis interventions, they argue, that have been in the best interests of all shareholders. And there have been frustrations elsewhere with the quality of decision-making.
Chief among these was the second major round of hedging losses that totalled £96m and led to the resignation of chief executive Tim Clarke in 2009. For several months before the company came clean on the losses, Lewis, I’m told, was convinced that the losses were already, effectively, crystallised and needed announcing to all shareholders.
They argue that there was a two-month false market in M&B shares as the board stayed firmly in denial mode on the losses. When the board finally came clean Lewis was left wondering whether there were other skeletons in the cupboard. The M&B balance sheet does not have a lot of spare cash sluicing through it – around £1.8bn of turnover produces £40m of free cashflow.

Reluctant support​
And the Lewis camp has, I’m told, been broadly opposed to all asset sales by M&B. The sale of 333 wet-led pubs, for a net £353m is the prime case-in-point. Book value only months before the sale was £75m higher at £438m — ebitda had fallen from £70m in 2007 to £55m in 2009. The deal only won reluctant support from Lewis after he found there was a £12m break-fee payable if it didn’t proceed.
Likewise, Lewis felt 50 or so pubs in the so-called franchise division were being sold far too cheap at around £31m for an 85% freehold estate producing above £5m of ebitda. A number of the pubs are prime London freeholds in places like Drury Lane and the City of London. (If you hadn’t noticed, the strategy is completely changed here and the company is intent on taking sites back under direct management as leases elapse – witness The Engineer in London’s Primrose Hill).
Likewise on acquisitions, Lewis was invited, I’m told, to opine on the potential purchase of Wagamama. It is a great business but was being offered at a significant premium to the £215m price that Duke Street Capital paid and a giddy multiple of earnings for a leasehold estate.
There was also a rumour that Lewis opposed the proposed £8m annual cost of maintaining a large debt facility as part of a £500m warchest when there was no obvious target in view. Chief executive Adam Fowle left soon afterwards, but not at the behest of Lewis.

Head-scratching​
On the face of it, you’d have thought Lewis would have taken some pleasure last year as the M&B shares chugged up to its January 2011 high of £3.60, an almost 300% increase on his in-price. The market clearly approved of the core brand expansion strategy. Not so. Lewis regards his stake as illiquid and thought there was a fair bit of hype around the company’s progress given it made a £84m loss last year and still can’t generate any free cash to pay a dividend.
Lewis’s associates also insist they have no meaningful links with interim chief executive Jeremy Blood. They are grateful that someone was prepared to step up from the non-executive bench to fill in as chief executive – but insist they are frustrated that a new chief executive has not been appointed. (There is an acknowledgement that the job has been made harder to fill during the current bid uncertainty).
There’s also head-scratching that Elpida, the Irish-owned vehicle that holds a stake around the same size as Lewis, has not claimed a single place on the M&B board — despite being offered one a number of years ago — while Lewis’s Piedmont has two.
All in all, it’s a picture of a committed, long-term investor trying to ensure that M&B fulfils its potential and ends the years of self-inflicted damage. The suggestion is that any bid would involve a share alternative in Lewis’s private vehicle for existing shareholders or an alternative of straight cash — so there would be options for shareholders.

Options​

Lewis’s camp were still maintaining last week, following the company trading update, that Piedmont was “seriously considering (its) options” — a standard piece of expectation dampening strategy that seeks to suggest that Lewis could just sit on his hands and maintain the status quo.
The Lewis camp has around two weeks now to table a formal bid for M&B. Ordinarily, the market would expect a minority shareholder to pay a premium to take control of a company. The suggestion (from others) is that an offer of around 260p would win the board’s support and I still expect Lewis to gather the backing eventually to take M&B private. But it’s not much of a premium - the 230p indicative offer was a wafer-thin 5% premium to the market close before Lewis unveiled his first hand. An improved offer of around 260p is still not exactly generous to fellow shareholders.