Mitchells & Butlers Unwinds Sale Leasebck of 1,300 UK Pub Portfolio

Telegraph - January 29, 2008

Mitchells & Butlers' finance director has resigned and the chief executive has offered to go after an attempt at a complex financial plan went wrong in the face of the credit crunch, costing the owner of the All Bar One chain £274m.

Tim Clarke, M&B's chief executive, also offered to resign, but the offer was rejected. All executive directors, including Mr Naffah, have agreed to forego their 2007 bonuses.

The losses were made when M&B decided to close interest rate and inflation hedges that were put in place to protect plans for a property joint venture that was shelved with the onset of the credit crisis. The property deal would have seen M&B sell about 1,300 pubs into a specially created company and then lease them back.

The idea was to give M&B a cash windfall from the sale of property to return to shareholders. On the advice of bankers from Citigroup and Royal Bank of Scotland, Mr Naffah opted to take out inflation and interest rate hedges to protect M&B against the extra debt it was taking on to do the deal and to hedge against long-term rises in pub rents.

The trouble was that recent turmoil in the financial markets has meant that long-term expectations for interest rates and inflation have shifted. M&B expected long-term inflation to fall and interest rates to rise.

In a sign of how rapidly M&B's position got worse, post-tax losses associated with the hedges stood at £180m in early January, but as economic conditions worsened and the expectation that interest rates will be cut has grown, the loss has escalated to £274m in a matter of days and weeks. Sphere: Related Content