M&B shareholders unimpressed by Punch's plans for £11bn merger

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The Independent Online

Plans by Punch Taverns to create an £11bn pub giant through a tie-up with Mitchells & Butlers could face opposition from shareholders keen to secure a profitable exit from the owner of the All Bar One chain.

Under Punch's offer, both sets of shareholders would own 50 per cent of the enlarged company of 10,500 pubs, while investors in Mitchells & Butlers would also receive a £175m cash sweetener, which represents a special dividend of 43p a share.

Punch's chief executive, Giles Thorley, would head the new company, with its finance director, Phil Dutton, remaining as finance chief, while M&B's chief executive, Tim Clarke, would be non-executive chairman.

However, M&B, which put up the "for sale" signs last week after revealing the company is to write off profits of £391m following a failed property venture, yesterday said it has received "continued expressions of interest from third parties". The private equity firms Cinven, CVC Capital Partners and TPG are understood to be running the slide rule over the company which could lead to a bidding war.

Shares in M&B rose 16.25p to 466.5p yesterday while shares in Punch were down 46p to 667.5p.

Analysts said the biggest stumbling block for the deal would be M&B shareholders and specifically its biggest investor Robert Tchenguiz. Although the tie-up makes strategic sense, investors in the company are looking for a profitable exit. It is estimated that about 60 per cent of shareholders bought in last year in the hope of cashing in on the property venture.

Angry shareholders, who have seen the value of their investment in M&B halve in the past seven months, last week called for the scalps of the M&B chairman Roger Carr and Mr Clarke at the annual general meeting after the finance director Karim Naffah fell on his sword. There would be no place for Mr Carr in a combined Punch and M&B, under the proposals.

Mr Tchenguiz, who owns 23 per cent, was the joint venture partner with M&B in its plans to spin out 1,300 pubs into a separate property company, and is keen to recoup some of his losses. The deal was days away from going ahead last summer when the credit crunch struck and its bankers pulled financing. Unluckily for M&B, hedge positions were in place to secure the deal and they had to be closed last week, leading to the multimillion-pound losses. Mr Tchenguiz has previously launched a 550p a share bid for M&B, which also owns the Harvester chain.

Analysts said M&B would not have considered a tie-up were it not for the losses following the collapsed property deal.

Geof Collyer, an analyst at Deutsche Bank, said he saw the move as "an opportunistic bid by Punch management". He said Punch "could hardly have envisaged a situation whereby the best managed pub group in the UK would put itself up for sale" at a time when private equity bidders are "probably unable to match the publicly quoted groups' currency".

He added that if M&B is unable to get another bidder to the table, the board will struggle to say no.

Matthew Gerard, at Investec, said M&B's pubs are among the most profitable in the business with average profit per site of £180,000. "It is difficult to see Punch materially improving operational performance in M&B's estate, but it would be likely to retain M&B's key management to implement change in its own managed business," he said.

The main synergies of a deal would come from the merger of M&B with Punch's managed estate, which were mostly acquired in 2005 when Punch bought Spirit for £2.65bn.

Punch yesterday said there "is substantial strategic rationale in combining the two businesses, including opportunities for operational synergies in the managed pub business and through a reduction in central costs." There is a 30 per cent overlap between the two shareholder registers.

Punch owns about 8,500 tenanted and managed pubs while M&B has 2,000 managed outlets with food making up about 20 per cent of sales. Pub companies have invested heavily in improving their food offering as they seek to transform themselves in the wake of the smoking ban.