Mitchells & Butlers blames instability for £140m deficit

The pubs giant Mitchells and Butlers is facing a liability of £140m from its failed £4.5bn property venture with Iranian entrepreneur Robert Tchenguiz after it was ditched due to the instability in the debt market.

The company, which operates 2,000 pubs including the All Bar One and O'Neill's chains, was close to launching the joint venture in July after more than two months of preparation that would have seen it sell a 50 per cent stake in its portfolio of pubs into a highly leveraged venture with Mr Tchenguiz's R20 vehicle. However, it had to shelve its plans the following month due to the turmoil in the credit markets. In order to increase the chances of the deal going ahead, M&B and Mr Tchenguiz's investment company R20, had entered into a number of debt-hedging arrangements designed to contribute to the joint venture. At the end of July the liability stood at £60m.

M&B said the £140m deficit on the hedges "reflects the combined effect since July, of reduced long-term interest rates and higher long-term inflation expectations brought about by the recent instability of the debt market". Rather than a cash loss for the company, the deficit represents the current value of the hedges put in place. "The impact of marking-to-market on the inflation hedge in particular has been exacerbated by sharply reduced liquidity for such instruments under present market conditions," M&B said.

However, it said it still believes substantial value can be released to shareholders by spinning out its property assets and said it is in bank talks with a view to agreeing a deal when the debt markets have stabilised. Shares in the company fell five per cent yesterday, down 29.5p to 589.5p. Analysts at ABN AMRO said: "The increased mark-to-market is disappointing and the stock is likely to react negatively, but it is not surprising given the reduced debt market liquidity. More reassuring are the comments on trading and the fact that M&B and R20 continue to pursue a property transaction, although this will of course require a stabilisation of debt markets."