Punch proposes share merger with M&B

Last Updated: 1:43am GMT 05/02/2008

Mitchells & Butlers says it will 'give careful consideration' to the move, which would create a £4bn company. James Hall reports

Punch Taverns, the pub group, has proposed an all-share merger with Mitchells & Butlers, its under-fire rival, in a move that would create the UK's biggest pub company.


	Giles Thorley, Punch chief executive [left], and Tim Clarke, chief executive of Mitchells & Butlers

Punch's proposals, outlined in a brief statement to the stock exchange yesterday, would create a £4bn pubs giant and see shareholders in both chains own 50pc of the combined entity. M&B shareholders would also get a cash payment of £175m, equivalent to 43p a share.

The move was the first blow in a possible takeover battle for M&B, which owns the All Bar One chain. M&B said that, after the commencement of a strategic review last week, it would "give careful consideration" to the proposal.

It added that it has had continued expressions of interest from other parties.

Punch's approach came days after M&B, which also owns the Harvester chain, said it closed financial hedges connected to a failed property venture last year. The debacle cost M&B £274m and effectively led the company to put itself up for sale.

Few details were provided by Punch about what strategy it would implement at the enlarged group. However, Giles Thorley, Punch's chief executive, would take up the same position at the combined group, while Tim Clarke, the chief executive of M&B, would become non-executive chairman.

Roger Carr, M&B's chairman, is expected to leave.

Analysts expect synergies of up to £50m to be achieved at the combined group, while industry experts believe that around 200 pubs will have to be divested of for competition reasons.

Key to the deal going ahead is Robert Tchenguiz, the Iranian property magnate who owns 23pc of M&B. Friends say Mr Tchenguiz is holding his cards close to his chest until he knows more about Punch's offer. However, he is believed to be amenable to a deal that would extract value from the combined property assets of the group.

One option Mr Tchenguiz is thought to favour is a splitting out of the combined group's operating business from its real estate assets, which could be converted to a REIT.

However, Mr Tchenguiz could decide to oppose the deal and increase his stake to 29.9pc. Bankers believe he could also team up with private equity players and mount a counter-offer.

Blackstone, CVC Capital Partners and TPG are some of the private equity groups thought to be looking at M&B. Observers believe that another trade bidder could be Whitbread, although this was downplayed by an executive close to the company. Analysts pointed out that the deal would be dilutive for Punch shareholders and that it would come with considerable execution risk.

However, Evolution Securities said that the all-paper naure of the Punch proposal means shareholders would benefit from any future pick-up in real estate values. "Shareholders who would prefer to wait for pub real estate values to recover can do so as shareholders in the merged group," the broker said.

Deutsche Bank described the deal as "opportunistic" from Punch's point of view. "Punch's management could hardly have envisaged a situation where the best managed pub group in the UK would put itself up for sale at a time when other bidders [private equity] are probably unable to match the publicly quoted groups' currency," the bank said.

Punch closed down 46 at 667.5p, capitalising it at £1.78bn, while Mitchells & Butlers rose 16.25 to 466.5p, valuing it at £1.88bn.

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