A buy-out of Mitchells & Butlers (M&B) by Greene King would mean significant earnings uplift for shareholders of both companies, and M&B’s billionaire investor Joe Lewis may be unable to block such a move, according to leading City analysts Paul Hickman. Hickman, of Peel Hunt, said there’s a chance that after the latest M&B price slump, “dominant shareholders could be attracted to a bid from a third party”. He analysed the possible outcome of Greene King moving for M&B after the FT two weeks ago reported that Greene King had proposed a merger at around 360p. “There were two problems: first the deal would have been conditional on Piedmont [Lewis’ investment vehicle] relinquishing its two board seats and, secondly, on both it and Elpida selling their holdings in the enlarged group. Greene King also demanded the right to install the chairman and CEO. “However, others close to the proposed deal reportedly said there would have been about £100m of synergies, which would not have been available to Mr Lewis. We believe that level is credible. Mitchells central costs are c4.5% of turnover, around £80m, and significant purchasing synergies should be available to Greene King when combined with the Mitchells’ systems.” Hickman, who reduced his target price for M&B from 270p to 260p, assumed that under such a deal at a transaction price of 330p, M&B shareholders might be offered three Greene King shares for every four M&B shares. “From the viewpoint of a Mitchells shareholder, an 0.75 Greene King share would provide entitlement to 45p of the 60p combined EPS, a 33% enhancement to the current situation. “If the combined entity were valued at 8.2x ebitda, the value would be 440p, an 83% uplift against today’s 240p level. Institutions, and even Elpida with its 24% shareholding, should rush to accept Greene King paper if it is offered in this way. In that situation, even Mr Lewis’ 22% might not be a blocking vote. “A Greene King shareholder would see earnings enhancement of 16% and, on the same assumptions, a share price gain of 30% as the deal structure raises the PER from 8.4x to 9.2x. We exclude top-line enhancement that would be available from the input of Greene King sites into what would become a super-brand structure.” Following last week’s news that Piedmont has dropped its bid for M&B, Hickman, who retained his Hold recommendation for the managed pub operator, said M&B is back to the situation before the indicative bid in July. “As before, the shares are now destined to underperform until it acquires a stable management team, and enough time elapses for the team to show that it has space and authority to manage. The one negative that has been removed is the suspicion of a cheap bid succeeding. That has been explored and rejected by the Lewis camp.”