Punch shares hit by rumoured bid for M&B
Rumours of a Punch Taverns bid for Mitchells & Butlers has undermined its share price because of the limited logic of such a deal, Panmure Gordon analyst Douglas Jack has claimed.
Jack said: "There are possible positive catalysts for the shares, but none of them are imminent. Punch has shunned corporate activity to focus on its core pub estate amid consumer weakness, increased cost and competition in the pub restaurant market and smoking bans.
"Parts of the leased pub estate must have suffered, but proactive management should result in the outcome not being as calamitous as some have predicted.
"Our recent downgrades were more orientated towards the more operationally geared managed estate. Rumours that Punch is going to bid for Mitchells & Butlers have undermined its shares, perhaps due the limited logic in such a deal.
"With the credit markets closed, Punch would have to finance this deal with paper. This would be extremely expensive on the basis that it would have to pay a premium for M&B shares which, at 12.8x before hedging losses, are already on a 58% valuation to Punch's shares, which are on a P/E of just 7.8x.
"There are realistic positive catalysts for Punch, but they may not be imminent. These include using free cash flow to either buy back equity or make small acquisitions in a marketplace that should throw up opportunities.
"Alternatively, it could narrow its valuation discount to Enterprise by demerging its managed pub division, which could become a precursor for more corporate activity."
