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Mitchells & Butlers’ lacklustre results increase likelihood of bargain takeover

As pub group’s sales come to a near standstill, Joe Lewis says he wants to take the company private only to protect his stake

The prospects of billionaire currency trader Joe Lewis securing a bargain basement takeover of Mitchells & Butlers has increased following a lacklustre trading update from the pub restaurant group.

The group behind Browns, Harvester, O’Neill’s and Nicholson’s, said comparable sales growth had ground to a near standstill — ahead by 0.5% — for nine weeks to 17 September. Like-for-like sales for the previous nine weeks had been up 2.8%.

The drop in sales performance came despite running more promotions, which resulted in lower margins. Rising alcohol duty, fuel and food costs are also putting pressure on margins.

Richard McGuire, who heads up Lewis’s European operations and is a former M&B director, said: “It is a very, very disappointing report card for all shareholders and we are seriously looking at our options.” Lewis’s bid vehicle, Piedmont, which owns 23% of M&B shares, recently said that it was considering a tender offer to other shareholder at 230p a share.

Lewis, who has two representatives on the M&B board, has told friends he does not believe he should have to pay a premium to take over the company. He claims that he is unhappy with his investment and is only grudgingly looking to take the company private to protect his stake.

The Lewis camp is also starting to raise concerns about a likely widening in M&B’s pension deficit, calculated last year on an actuarial basis at £400m.

However, other shareholders and analysts fear that Lewis is poised to win controlling ownership of the business at a price that substantially undervalues the business. The three remaining independent directors on M&B’s heavily depleted board have indicated they would not recommend an offer at 230p. Meanwhile 21 out of 22 analysts that cover the stock also have target prices above 230p.

Nigel Parson, an analyst at Evolution Securities, said: “Sliding sales should strengthen Piedmont’s position and we now expect a bid shortly … The share price(which closed at 247p)suggests the market will not accept 230p.”

Parson believes that the stock should be valued at 360p and notes that recent, smaller takeovers in the pub sector have been struck at 10 times earnings. Applying that multiple to M&B would give a price of 590p. “Unrealistic, we admit, but so is 230p,” he says.

M&B’s board is still struggling with credibility issues after years of strained relations with Lewis and other large shareholders, including Lewis’s Irish tycoon friends JP McManus, John Magnier and Derrick Smith, who hold a 24% stake. Past directors have complained that these investors teamed up to bully the board. But the takeover panel ruled that they were not improperly acting in concert.

Some minority investors and former directors nevertheless insist that the boardroom turmoil is of Lewis’s making – an accusation the tycoon says has been stirred up by disgruntled former staff.

After a series of resignations, the board now consists of just five directors: interim chairman Bob Ivell, interim chief executive Jeremy Blood, finance director Tim Jones (who has been in post less than a year), and two appointed Lewis representatives, Doug McMahon and Ron Robson.

It is understood that the trio of Irish investors would also have an entitlement to two seats on the board but have not requested such representation.

The Guardian revealed recently that Robson, M&B’s deputy chairman, had been quietly recruited to an advisory role to support Blood. He was given an office at M&B’s headquarters in Birmingham and an M&B computer with full access to latest internal management figures.

It is understood that he has now handed the computer back and stepped back from his operational advisory role. He and McMahon have also removed themselves from M&B board deliberations concerned with a likely bid from Piedmont. Lewis insists that Robson is not part of Piedmont’s bid team.

Meanwhile, as M&B starts to prepare its annual report following its year-end, the group’s entire board is taking on the responsibilities of the audit committee. This is because it was felt inappropriate for this work to be carried out by a narrow sub-committee chaired by Piedmont’s Robson.

Piedmont has been given until 17 October to decide whether or not to proceed with an offer. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds