Mitchells & Butlers Halts £4.5 Billion Sale Leaseback Deal

The Guardian - September 18, 2007

Annual profits at Mitchells & Butlers, Britain's biggest pub operator, are to be almost entirely wiped out by a £200m accounting charge relating to a property deal wrecked by recent turmoil in the debt markets.

Early last month M&B took out hedges against long-term interest rate rises and long-term deflation, in the final stages of negotiations on the debt-financed property deal. The hedges were put in place in order to secure the most favourable terms for debt raising. But just as the deal was to be signed - creating a £4.5bn property joint venture with real estate entrepreneur Robert Tchenguiz - the debt markets ground to a halt and the project collapsed.

M&B said the timing of the credit crisis left the company without a property deal but saddled with related hedges that would translate into huge losses if closed out. Nigel Parson, an analyst at Evolution Securities, noted that the accounting loss was not a cash loss, and there was little likelihood of M&B being under pressure to close out the position for some time. "The 'mark-to-market' discipline will serve as an ongoing reminder to the market of how close M&B got to its deal and how savage the debt crisis is/was."

M&B reiterated its determination to resurrect the property joint venture once the debt markets stabilised. "The board continues to believe that substantial value can be released to shareholders through the creation ... of a dedicated property company structure and discussions are continuing with banks to implement a transaction on acceptable financing terms."

M&B announced in May that it planned a property joint venture with Mr Tchenguiz's investment vehicle, R20, to which it would sell and lease back about 1,300 pubs. The collapsed deal would have seen M&B and R20 each inject about £300m of equity into the property company, which would borrow the remaining £4bn required to acquire M&B's 1,300 pubs. Sphere: Related Content