M&B: a cautionary tale

Few people could have seen events unfold at Mitchells & Butlers this week without feeling a little sympathy for Tim Clarke. The man credited as the architect of M&B’s value-volume strategy and market out-performance in recent years, chose to fall on his sword, as yet more disastrous news emerged from the company’s aborted property deal with Robert Tchenguiz. The hedge that refuses to die, taken out in readiness for the anticipated multi-billion JV with Tchenguiz’s R20, yielded further losses of £70m as M&B finally killed off the poisonous financial instrument. That it was still alive at all was a shock for many – M&B decided to retain 30% of it when it moved to close out losses last year. Clarke’s departure means that since what we were told was a groundbreaking and pioneering deal turned into a diabolical dog’s breakfast, the entire M&B executive has left. Finance director Karim Naffah was first to pay with his job, chairman Roger Carr followed, albeit he was allowed to leave more gracefully, and then last week Clarke. At the same time M&B’s two highly-regarded senior operators, restaurant managing director Tony Hughes and his opposite number at the pubs and bars arm Mike Bramley, who worked tirelessly with Clarke on moving the company away from the old food-is-11%-of-sales days of Bass, have both retired. When news of the eye-watering multi-billion pound property transaction first emerged in the summer of 2007 the key message emanating from the M&B boardroom was that this was about embracing change – it was time to adapt or die. The history books were littered with examples of companies that had maintained their position at the top table of sectors by being change leaders, first movers to brave new worlds. M&B’s dalliance with property investor Robert Tchenguiz was borne out of a desire to accept new value paradigms and close the “value arbitrage” between the stock market and the world of leveraged finance and property. It soon transpired that this was top of the market stuff – balance sheet jiggery-pokery – the dizziest excesses of the asset bubble. Ultimately, the M&B board allowed themselves to be seduced. The real sore point is that alongside JD Wetherspoon M&B is one of the pub and restaurant sector’s stand-out businesses, with great customer propositions and formats, compelling scale and highly-sophisticated central operations. As The Times’ leisure industries correspondent Dominic Walsh writes in the next issue of M&C Report: “The tragedy of the situation is that while M&B has proved something of a disaster from a financial standpoint over the past couple of years, in an operational context its performance has been top drawer.” And the man who has directed that performance – and was seemingly completely wedded to the company – has paid the price for a moment of madness. In a note written in the aftermath of last Thursday’s interims Deutsche Bank’s Geof Collyer wrote: “He will be sorely missed, having been a driving force of the pub business for the best part of 15 years.” And what of M&B’s army of handsomely paid advisers and banks? In the luxury of hindsight it is clear that the more earthy advice of telling Tchenguiz to either bid for the company or get lost was the best available. The M&B debacle is one of the ultimate cautionary tales of our time, one that will no doubt be trotted out when, at the top of the next cycle, CEOs and their boards are being advised to pay 15 times ebitda or to sell all their freeholds in exchange for lease agreements and massive rents. So what now, or should that be: so who now? Chief operating officer Adam Fowle, who has stepped up to acting CEO, is said to be the hot favourite, with the backing of chairman Drummond Hall, and other names being mentioned in dispatches last week included Carl Leaver, the former Whitbread director and De Vere chief executive, who has just parted company with Sir Stuart Rose at Marks & Spencer. Presumably it is only a matter of time before Bob Ivell, who has strong connections to elements of the M&B share register and used to run Scottish & Newcastle Retail, is linked with the top job in some way. Meanwhile, in Watford… A quick word on JD Wetherspoon, that other stand-out managed house group. It seems “The Spoons” wins more fans by the day, not just for the way it runs its pubs but also for how it is growing its estate in this downturn. Latest word on the industry jungle drums is that Wetherspoon is poised to take a clutch of sites from 3D Entertainment. Having switched its expansion strategy from a long-standing policy of finding new unlicensed shells to taking existing pub premises from other groups that are either in administration, struggling or just happy to sell, the 3D deal is the latest in a growing line of pub and bar acquisitions. JDW is taking what are mostly well-invested leasehold sites previously run by companies like Laurel, renegotiating the rents – the landlord is more open to this because of the JDW convenient and implication upon freehold value – and applying the Wetherspoon and Lloyds brands. It recently landed its first site in Oxford through such a transaction. The strategy has vastly reduced the capital outlay required for each new site and consequently dramatically altered its returns profile. Not only has JDW demonstrated it is one of the best performers out there, it is also proving a canny operator in the property market right now.