Mitchells & Butlers (M&B) has confirmed that it has entered exclusive talks to buy the majority of the Orchid estate.
M&C reported last night that M&B is understood to have moved ahead of private equity competition and entered exclusive talks to acquire the majority of Orchid Pub Company, for a sum of c£265m.
The Alistair Darby-led operator is believed to have beaten off competition from Starwood Capital and Colony Capital in a deal, which is thought will see it acquire c175 of Orchid’s best performing sites, M&C reported.
In a statement released this morning, M&B said it “notes the recent press speculation regarding the Orchid Group”. “Mitchells & Butlers confirms that it has entered into exclusive discussions regarding the potential acquisition of the majority of the Orchid estate.
“Discussions are ongoing and there can be no certainty that a transaction will be concluded.
“A further announcement will be made in due course as appropriate.”
It is understood that the remaining c60 sites will be placed in administration with Ernst & Young, while M&B will dispense dispense with Orchid’s head office led by Rufus Hall in St Albans, saving c£8m.
Leading analyst Douglas Jack at Numis said such a deal ”is a good one for M&B, at a price it can comfortably afford”, generating incremental EBITDA for M&B of potentially £35m, with EBIT at £24m.
“Estimating that the deal could be 7-9% earnings accretive, we would use recent weakness as a buying opportunity,” said Jack.
”M&B is outbidding private equity firms Colony Capital and Starwood Capital by £10-15m. However, as a trade buyer with £0.25bn of excess cash sitting at PLC, M&B can afford to. After all, M&B is likely to close Orchid’s St Albans head office, which cost £8.6m in the year to Dec 2012. M&B’s central cost saving alone could offset its incremental financing costs for the deal.
“In the year to Dec 2012, Orchid reported EBITDA of £29.3m on turnover of £178.8m, with LFL sales up 3%. We believe that: the sites M&B is not bidding for are relatively unprofitable; Orchid has traded positively since 2012 (including sales growth of 9.8% in Christmas/New Year 2013 and 5.5% in Q1 2014); and that not all of Orchid’s head office costs will be avoided. On this basis, incremental EBITDA for M&B could be £35m, with EBIT at £24m.
“M&B currently earns little interest income on its £250m of PLC cash. We believe a new banking facility would cost close to LIBOR +2%, but provide ample headroom. Thus, incremental interest costs should be £5-10m, implying 7-9% earnings accretion, by our estimates. In addition, M&B is also likely to target high returns from converting many of Orchid’s sites into its own brands.
“We estimate M&B would be paying a post-synergy EBITDA multiple of c.7.5x. The combination of an estimated c.13% cash return, a low cost of financing and no need to raise equity should make this transaction strongly earnings enhancing. Our only concern is that the resultant capex commitment to the Orchid estate could be used as an excuse to further postpone a resumption in the dividend.”
