Inside Track by Mark Stretton
Mitchells & Butlers is fast approaching its very own D-Day – Do-we-or-Don’t-we? Day. The company is under pressure from “activist” shareholder Robert Tchenguiz to realise the property value in its pub estate, by placing the freeholds in a separate tax-efficient vehicle, one that qualifies for Real Estate Investment Trust (Reit) status. This will effectively mean selling its pubs, something that M&B would rather not consider if it were not completely necessary. The fly in the ointment, aside from Tchenguiz, who owns about 17%, is the value arbitrage between what M&B is worth today, and what is potentially worth as an operating company and a Reit. The sum of its parts through these structures may well be worth more than the group as a whole. Although there is potential for substantial value uplift, the question is: at what cost? Such a move would see the separation of an intimate relationship between operations and trading asset, one which M&B to date has placed great emphasis upon. It is a “jam today” conundrum. The rest of the asset-rich pub world is waiting to see what M&B announces when it unveils interim figures later this month. Reports over the weekend suggested that the operator of All Bar one, Harvester and Toby would counter a Reit by opting to follow Britain’s biggest supermarket operator Tesco in adopting a property joint venture. Tesco banked £570m in March after injecting some sites into a joint venture with British Land. Both parties put in £80m of equity, the properties were valued at £650m and leased back to Tesco at an initial rental yield of 4.46%. The grocer retained a call option that allows it to buy back the properties in 10 years. According to Deutsche Bank, such a move would see M&B release as much as £950m – 220p a share – as a result of selling 20% of its estate to a joint venture property company. Asset-rich companies are under more pressure than ever before to leverage their property portfolios. It is why Whitbread recently announced that it would add £400m of debt to its balance sheet, although given its rich asset base, it will before long come under pressure to do more. Pub companies have effectively communicated the desire for freeholds and the long-term benefit to shareholders, but the emphasis required in explaining the model will be even greater, in order to keep investors onside. It may be that pub groups will have to adopt increasingly aggressive attitudes to debt. Maybe the role of an asset or property director, where an individual is tasked with crystalising some of the value in the property portfolio, will become more pertinent within pub companies. Reits have been described as a tax-efficient sale-and-leaseback, with real cash benefits for shareholders, but it still requires the separation of operating businesses and licensed property. If this is undesirable, pub groups will have to find other ways of delivering more cash to investors. We may witness “trial” Reits. There is nothing to stop a perceived candidate placing a small proportion of its estate into such a structure (possibly dubbed Reit Petites?). May be the days of entirely freehold pub groups are coming to an end. The pub industry is facing a monumental transition to non-smoking, which will be to the benefit of some pubs and to the detriment of others, so timing-wise, the advent of Reits is not great. Maybe the spectre of Reits will be enough to close the arbitrage between values today and the perceived value of Reits structures tomorrow. Maybe Reits will help to deliver a re-evaluation of what a combined group is worth. But if not, there is the prospect of private equity firms coming along using that value arbitrage to buy these companies – and split them. If I were a betting man, I would say the UK pub industry will probably not prove to be all Reit, but maybe this is just typical resistance to change, maybe the pub industry of tomorrow will be “asset-lite”. Far greater minds are giving very serious consideration to this structure. As one senior pub company executive told me: “If you think back to the Beer Orders, those that were open to change and really grasped the opportunity were the ones who cleaned up. Those that were fat, dumb and happy did not survive.” M&C Report, alongside sister publications Hotel Report and Leisure Report, is to host a seminar on Reits and their application to the UK leisure market, to be held at Brown's Hotel in London on 21 June. Speakers will include Mark Nichols at CMS Cameron McKenna and Stephen Herring of BDO Stoy Hayward and it promises to be a must-attend event for anyone considering conversion to a Reit. For further details please contact me on 01293 846 549 or