M&B avoids Scottish thorn

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Mitchells & Butlers made the right decision when it walked away from the Scottish & Newcastle pubs auction. To win, it would have been forced...

Mitchells & Butlers made the right decision when it walked away from the Scottish & Newcastle pubs auction. To win, it would have been forced to top the successful Spirit Group offer, presumably involving an outlay in excess of £2.51bn. Such a payment would have stretched the pub chain and, at the same time, created a great deal of management uncertainty. Twice recently the drinks industry has demonstrated its willingness to surrender when a deal becomes unattractive. Only last week, Allied Domecq abandoned its pursuit of Australian wine group Peter Lehmann. The stock market applauded Allied's retreat, just as it had earlier signalled its approval of M&B's withdrawal. It seems M&B believed a top value of the Scottish estate was around £2.3bn. With the fancy financial engineering now available, particularly to pubcos with their strong cash flow and asset backing, it would not have encountered any serious problems getting a buying package together. But many would have fretted about its resultant debt pile. The Spirit Group's winning bid has forced it to take on board increased debt. It is an unlisted company and not subject to such intense scrutiny as quoted M&B. So its borrowings are not going to occupy many, with the exception of its select band of private equity backers. It can also get on with integrating the two sets of pubs in a rather less obtrusive atmosphere than is available to a quoted company. M&B is not averse to modern financing. It is indulging in a securitisation exercise ­ mortgaging future cash flow in return for a lump sum. And it is handing to shareholders, happily in time for Christmas, around £500m or 68p a share. The cash payment should in no way curtail any relatively modest expansion plans nursed by Tim Clarke, M&B's chief executive and a former City drinks researcher. After all, his securitisation deal is approaching £2bn, leaving a reasonable sum available for suitable buys. Since M&B arrived on the stock market earlier this year it has had an eventful time. It has resisted take-over approaches. At one time Laurel Pub Holdings, now regarded as a likely bid target, thought about striking. I suppose there is always a possibility M&B could be interested in buying Laurel, but after its Scottish experience I believe there is little chance a price could be agreed. The pub chain represents the managed estate of the old Bass empire, once the nation's biggest brewer. It sold its breweries and became Six Continents, a hotel and pubs group. Following pressure from big City shareholders it split into two in April ­ M&B and the InterContinental Hotels chain. Shares of both have performed reasonably well since the demerger, which was accompanied by a cash distribution. There was considerable merit in hotels and pubs going their separate ways. Financier Hugh Osmond tried to sabotage the split with an unsuccessful and cheeky bid. The resultant groups have undertaken quite a few of the actions he advocated, such as securitisation. But, then, they were clearly thinking along such lines before the man who created Punch Taverns, largely from the Bass tenanted estate, arrived on the scene.

Related topics: Mitchells & Butlers

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