Mitchells & Butlers outlines property spin-off plans UPDATE

Mitchells & Butlers outlines property spin-off plans UPDATE

	Published : Tue, 22 May 2007 11:01 By : Agencies Print this Story

(Recasts, adds detail and comment from conference call)

LONDON (Thomson Financial) - Pub restaurant specialist Mitchells & Butlers PLC carried out a 'wide-ranging and competitive' process before the announcement yesterday that it was investigating the creation of a 50/50 joint venture with Iranian investor Robert Tchenguiz for its property assets.

Speaking during a conference call this morning, chief executive Tim Clarke said: 'We have conducted a wide-ranging and competitive process with a number of major UK property companies and private investors in pursuit if the most favourable terms for shareholders.'

As the Harvester and All Bar One owner revealed interim pretax profits before exceptional items of 89 mln stg, down 2 pct on the previous year, and EBITDA up 11.1 pct to 230 mln stg, it also expanded on the extensive review of options for its property portfolio, worth over 5 bln stg.

The group said it concluded that the most appropriate solution lies in securing value for up to 50 pct of its property interests through a partnership structure. However, today it re-iterated that it is exploring the possibility of a 50/50 joint venture for the majority of its property assets with R20, the investment vehicle of 15 pct stakeholder Robert Tchenguiz, after it emerged as the 'most competitive bidder' in the process.

Mitchells & Butlers today said the market for Real Estate Investment Trusts is insufficiently developed to warrant conversion to the tax-efficient vehicle, however, finance director Karim Naffah admitted the new property company could apply for REIT status in the future.

'There's no reason why, if the partners agree, subject of course to meeting the rules of the REIT requirements, that the vehicle could not apply for REIT status in the future,' he said.

Naffah said the group had been 'weighing up very strongly' the potential value for shareholders of separating out the property assets against the 'clear synergies' of keeping the operating company incentivised to help drive the longer term appreciation of the assets, with pubs valued on a multiple of the sales and profits they generate.

'Because we believe the REIT market still in its infancy, it's difficult with confidence to say there will definitely be such a significant uplift in the value of the property to warrant complete separation from the operating company,' he said.

Naffah also said certain assets would not be incorporated into the new property venture, admitting that the former Whitbread pubs currently under conversion may be excluded.

'There are certain assets because of their stage of development, or the plans we have for those assets, where clearly it would be in our shareholders interests at this stage for those not to go into any such partnership,' he said. 'Whether or not there comes a point in the future where that become appropriate, we keep under review.'

Mitchells & Butlers said the rental value set on its entire freehold and long leasehold portfolio, based on expert advice, would be approximately 270 mln stg a year.

Mitchells & Butlers declined to set a timeframe for the property deal, while, in a note to investors, Mark Brumby of Blue Oar Securities warned: 'Should (interest) rates continue to rise, the property market wobble or fires break out elsewhere for either party, the deal may not happen.'

However, should the deal go ahead, Clarke said the company would not hesitate to 'swiftly' return surplus cash to shareholders.

In a note to investors this morning, Morgan Stanley suggested the pub group could finance a 1.5 bln stg return to investors.

At 10.22 am, shares in the group had gained 9-1/2 pence to 887 pence.

Mitchells & Butlers said its 'value and volume' marketing strategy leaves it competitively well placed to withstand the impact of the successive rises in interest rates and the inflationary pressures on consumer spending, while it noted some encouraging trends from its pubs currently trading under the smoking bans in Scotland and Wales.

Clarke said there are 'increasingly encouraging' signs from Scotland, where like-for-like sales in the 16 weeks to May 12 were up 3.2 pct.

He said it is too early to draw any conclusions from the group's performance in Wales, but added like-for-like sales were up 2.5 pct since the ban came into force on April 2, a modest slowdown on the previous trend.

Clarke added that the 340 or so pubs in England which voluntarily switched to non-smoking -- around 20 pct of the estate -- saw have ry limited adverse affects'.

The group added overall trading in the 16 weeks since its AGM is in line with expectations.

It unveiled an interim dividend of 4.25 pence, up 16.4 pct on the previous year.

simon.meads@thomson.com

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