Demerger plan or sale prospectus?

Potential bidders are showing great interest in the intimate trading details of one of the world's biggest hospitality groups. By Mark Stretton.

As the pub industry digests the resurrection of the Mitchells & Butlers name, the City's brightest minds will be digesting something far meatier.

Last week Six Continents, the leisure giant with a vast empire of hotels and managed pubs, unveiled plans to split the divisions into two separate companies.

The pubs arm that includes retail brands such as All Bar One, Ember Inns, Harvester, and Toby will be renamed Mitchells & Butlers after the Midlands brewer that Six Continents, then Bass, bought in the 1960s.

The demerger plans have exposed the intimate trading details of the business. Now that the operations of one of the world's biggest hospitality groups have been laid bare for all to see, a number of potential bidders will be eyeing the prize.

One leisure analyst described the plans as "the most benign way of putting a company up for sale".

A host of names have been linked to the businesses. But this is normal practice, and speculation in national newspaper columns, including name-checks of the usual suspects such as Hugh Osmond, the Punch Taverns entrepreneur, and Luke Johnson, smacked of guesswork.

However, there is real evidence that Mr Osmond's Sun Capital Partners is preparing a bid depending, of course, on the hard numbers in the demerger documents.

Mr Osmond is already said to have taken advice from bankers, thought to be Credit Suisse First Boston. "It is safe to say he is monitoring the situation closely," said one source last week.

Cinven, the venture capitalist that collaborated with Enterprise Inns to buy the £2bn Unique and Voyager pub estates from Nomura, is thought to be in the frame.

Other groups touted include CVC Capital Partners, Permira and WestLB. Even Enterprise Inns and Pubmaster have been linked to a deal.

The list of possible suitors for the hotels division, which includes the Crowne Plaza, Holiday Inn and InterContinental brands, is even longer.

Marriott International, the US group that narrowly missed out on InterContinental when Six Continents bought it for £1.8bn five years ago, is favourite.

Starwood, owner of the Sheraton chain and Accor of France, is also eyeing the business and Hilton Group, despite initial denials, would not want to miss out. Six Continents has already received an offer, thought to be in excess of £100m, for its InterContinental in Mayfair, London.

Analysts value the hotels arm at £5bn and the pubs at between £3bn and £3.5bn, including debt.

Any potential bidder for the 2,000 pubs would probably want to retain the services of a highly respected management team led by Tim Clarke.

But the first thing a buyer would probably do is burn the chequebook.

The desire to generate large wads of cash that is the want of private equity may be in direct conflict with Mr Clarke and his colleagues.

The pubs would be starved of cash and having £200m in the bank for annual capital expenditure on the estate could become a fond memory.

One thing that would be tempting for the current management team would be the opportunity to improve their personal wealth beyond most people's wildest dreams.

The sort of incentive packages offered by private equity groups for good performance would represent the corporate winning lottery ticket and make Tim Clarke's current salary of £575,000 look like pocket change.

Six Continents and Safeway, the supermarket chain currently on the auctioneer's table, may not appear to have much in common, but both are asset-rich, cash-generative and perceived as underperforming (the recent trading update would tend to support that view).

The frenzy that has seen up to seven different groups show interest in Safeway suggests there is also an appetite for a business such as Six Continents.

Some say it is a question of when, not if. "I think it will go through with the demerger," said another analyst. "A takeover will be much cleaner to do afterwards.

"The trading news announced at the annual meeting was not good and many institutions have downgraded the stock. The separate businesses will not get the ratings they want. That makes both businesses bid targets.

"The big question is has anyone got the cash to do it? What is happening with Safeway would suggest so, but there are other under performing businesses in the pub sector that will prove cheaper than this."

Many are convinced that Mitchells & Butlers will not remain independent and the demerger documents could end up being a sale prospectus. "Everyone is looking at this one," one analyst told The Times newspaper last week. "It's just too big and too strategic an opportunity for them not to be looking."

Pictured: Mitchells & Butlers' highly respected Roger Carr (left) and Tim Clarke.​

Focus for investment​

Mitchells & Butlers chief executive Tim Clarke said the focus for investment in the demerged pub business would be on its residential brands, with up to 500 more sites scheduled for conversion to chains such as Ember Inns, Sizzling Pub Company, Vintage Inns and Toby Carvery.

Announcing the listings particulars for the newly created Mitchells & Butlers business, Mr Clarke said the average 60 per cent increase in sales achieved at converted pubs are hard figures to argue with. The next wave of conversions will bring the total to 1,200 pubs trading under the revamped residential brands, and there will be even more emphasis on food sales.

"We're fast approaching the point where food sales will overtake wet sales in the estate," said Mr Clarke.

However, town centre formats will continue to be developed as appropriate, with Mr Clarke pointing to the success of the Goose brand in targeting the value-for-money sector, as well as the popularity of venues such as Flares and Reflex.

M&B also plans to capitalise on its buying power to step up promotional activity.

A drive to reduce overheads by around £10m a year will see around 90 head office redundancies.

Mr Clarke would not comment directly on possible takeover approaches for the demerged business, but said: "Since 1995, the executive directors of this business have raised operating profit from £160m in 1994 to £289m in 2002. We have a strong basis on which to drive the business forward and generate returns for shareholders."