Analyst Peel Hunt has increased its target price for Mitchells & Butlers (M&B) from 275 pence per share to 325p and changed its recommendation from Add to Hold.

It follows the announcement yesterday (15 February) that the pub group intends to raise £350m by means of a share placing and open offer, at 210 pence per share – a 36% discount on the closing price on 12 February. The addition of 167m new shares equates to a 39% increase.

The proposal is being supported by M&B’s major shareholders – Piedmont, Elpida and Smoothfield – who have consolidated their holdings under a newly-incorporated holding company called Odyzean Limited, which now accounts for 55% of M&B’s shares.

According to a note from Peel Hunt, while Odyzean – now the controlling company – is supportive of management “they have already taken a more active role in the running of the company, commencing with plans to reduce the number independent NEDs (from five) and the time spent on PLC matters”. This may trigger corporate governance red flags for other shareholders, said Peel Hunt.

“Some institutions have already referred to this as a nil-premium takeover that leaves the company vulnerable to going private under a “low-ball offer” in the future,” it said.

The change to its target price equates to 8.5x 2023E EV/EBITDA vs. an 8.3x historical average and reflects the recovery in the company’s position pre-Covid.

On 7 January 2021, M&B announced that it had only £125m of cash (with all facilities drawn), and ongoing monthly cash burn of approximately £35m-£40m, with a further £50m of debt service due on 15 March 2021.

Commenting on M&B’s proposed raise, Mark Lynch, partner at corporate finance house Oghma Partners said it highlighted the continued need to provide liquidity in the hospitality sector until trading can reopen and companies can start generating cash again.

“There will be some hope that a government roadmap will set out the best and worst case scenario for re-opening in the coming weeks. At that point we would not be surprised to see more M&B type funding activity. It will be the smaller companies, with less access to liquidity, that are likely to struggle the most to survive and this will lead to further consolidation across the sector,” he added.