Talking up a £10bn supergroup

A growing number of analysts and shareholders believe that two of the pub sector’s biggest companies should come together to form a £10bn supergroup. A merger of Mitchells & Butlers (M&B) and Punch Taverns would create a pub and casual dining behemoth comprising almost 3,000 managed pubs and pub restaurants, alongside a leased division with 7,600 properties. It would own 17.5% of the pub market by number of sites, but about 22% of industry sales. Punch has a lot to gain, and this “blue sky” mooted merger is seen an alternative strategy for M&B. Plans by the UK’s biggest managed pub operator to realise value from its vast property portfolio – through a £4.5bn joint venture with Robert Tchenguiz’s R20 group – have faltered due to well-documented problems in global debt markets. M&B, led by Tim Clarke, recently reiterated its desire to proceed with the deal when the debt market rights itself, but there is a growing belief that the transaction may not happen at all, if the credit crunch is prolonged. One analyst, who asked not to be named, told me: “This is a corporate solution to problems in the debt market. Strategically, it’s a beautiful deal. You get consolidation in managed pub operations, more scale, more synergy.” Apparently, the deal could be struck at a nil premium – a pure 50-50 merger. Corporate activity could be afoot at Punch anyway. Giles Thorley is not one to sit on his hands for too long, and talk resurfaced recently of Punch spinning off Spirit, which Numis Securities suggests could raise £2bn. Another analyst suggested that M&B and Punch could be brought together, then separated again with M&B taking the Spirit business, but with all of the property freeholds remaining with Punch, creating a OpCo-PropCo structure. He said that with M&B writing its own leases, it could control the process – and even retain some ownership. If the leases were free-of-tie, it could tip Punch over the 75% rental income required to qualify for Real Estate Investment Trust status, he argued, thus realising tax benefits. In addition to the clutch of analysts that believe a tie up is compelling, shareholders are thought to be interested in the proposal. There is some commonality between the large institutional shareholders of the two groups: AXA is the single biggest shareholder in each group, with a 9.7% holding in M&B and 14.9% stake in Punch; Marshall Wallace owns 4.1% of M&B and 4.4% of Punch; and Legal & General has an equal 3.5% stake in both M&B and Punch. Clearly not everyone is banging the drum for such a deal. One highly-regarded analyst told me that a merger with Whitbread would be more beneficial to M&B, and Clarke for one – who has often voiced concerns over the leased pubco model – probably would not be in favour of such a move. Obstacles include the sheer complexity, the will of both boards and debt – the deal could be done without raising new debt, but debt would change hands, requiring noteholder consent. To say that a £10bn tie-up between Punch and Mitchells & Butlers is fanciful is perhaps an understatement. Logical? Yes. Compelling? Perhaps. But is it likely to happen? It’s fair to assume that the odds will be handsomely long at any one of the City’s slew of bookmakers. The important point is what is underlying all this talk – the perceived need for M&B to perhaps begin to contemplate alternatives to its JV with R20. Speaking on Radio 4’s Today programme last week, Richard Lambert, the former editor of the Financial Times and now head of the CBI, said that what companies really wanted for Christmas was some credit. But which Christmas? It may be that the debt markets have not re-opened sufficiently by December. For companies in pressing deal situations, timelines may need to be adjusted, exit routes and valuations re-assessed, and alternate strategies pursued. Pragmatism and dexterity are key.