Inside Track by Mark Stretton
Robert Tchenguiz is certainly a catalyst for change. Now that the Mitchells & Butlers board has fended off his unwelcome advances, the pressure is on to deliver. Although the business is in rude health, Tim Clarke & Co face a similar challenge to Marks & Spencer a few years ago – when it saw off Philip Green – to get the shares up and past the “undervalued” offer level. M&S has delivered, with share price currently riding at a 621.5p high, compared to Green’s offer of about 400p. Wolverhampton & Dudley Breweries (W&DB) pulled off a similar feat in 2001, narrowly defeating a hostile bid at 513p. It has since repaid shareholders. Greater operational performance, better efficiency and a number of acquisitions, has driven the shares up to 1334p. Rising property values and a strong stock market have also helped. M&B, as it alluded in an announcement this morning, must “maximise value for shareholders”. The tactics employed by Tchenguiz to land M&B were bemusing – having received a clear indication that 550p per share was nowhere near enough to get to the books, he proceeded to launch an indicative offer at that level anyway. If the tactic was meant to elicit support for the bid from shareholders, it failed. The bankers and analysts that I spoke to last week were all of the opinion that Tchenguiz’s first bid was merely a marker, before moving up to a more tempting level of somewhere between 575p and 600p. That bid never came. But in accordance with Takeover Panel rules, Tchenguiz is only timed out for six months. The increasing presence of property players such as Tchenguiz – added to continual interest from private equity – demonstrates that management teams must maintain maximum efficiency, both operationally and financially, if they are to prevent unwelcome predatory interest. It is not enough for M&B to be one of the best performing companies in the eating and drinking out market. It must now refinance for optimum balance-sheet efficiency, return cash to shareholders and re-double its efforts to find a value-enhancing deal. And that has to be good news for shareholders. M&B will not be the only company feeling pressure. Speculation is growing that Greene King could be the next takeover target, with the shares climbing 10% last Friday. In this climate, companies need to be managed more aggressively. Perhaps the biggest hurdle trade players face, is trying to consolidate a consolidating market, thus competing for deals with buyers like Tchenguiz. The Iranian entrepreneur is favourite to beat W&DB to the 290-strong Punch package currently up for sale, and is also surely the biggest hurdle to M&B buying 250 pub restaurants from Whitbread. Speed may also be king Tchenguiz and his property-savvy friends will not retreat from this sector following the unsuccessful attempt to land M&B. Companies such as R20 will continue to vie for asset-backed pub and restaurant businesses. While the operational ability of entrants such as R20 is yet to be quantified, the ability to operate in a superior financing sphere is not in question. The yields that such companies are prepared to live with coupled with their unrivalled ability to negotiate debt packages, has driven, and will continue to drive, value multiples. Whether the numbers are sustainable is a different debate. In order to compete in auctions trade buyers must use speed to win. Speed is a virtue that many of the property groups that own assets in the sector do not possess. What value vendors attach to that virtue is a moot point. For the Spirit consortium, it was £100m. Punch beat R20 to Spirit through speed. Remember Punch had £100m less on the table but because of the certainty of its funding and the ability to complete quickly, it won the £2.7bn auction. Speed is how Wolves can win the current auction of 290 former Spirit pubs and speed will be the way M&B will win the Whitbread package. Acquisitive companies such as Greene King, Punch, Wolves, and now perhaps M&B, will need to use speed to outrun the property players because in most cases, they won’t be able to out-pay.