Mitchells & Butlers crashes out of opco/propco deal


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Leading UK pub and restaurant group Mitchells & Butlers has been forced to shelve a £4.5 billion real estate joint venture and has been plunged into turmoil following a disastrous series of hedges that cost £274 million. As Liquid Real Estate went to press, the instability had prompted a bidding war for the company.

The joint venture was planned to be with R20, an investment company owned by property tycoon Robert Tchenguiz who, not coincidentally, owns 22.05% of Mitchells & Butlers. It would have reorganized Mitchells & Butlers to release value in the company’s property portfolio using the opco/propco structure.

Although the hedges were clearly the immediate cause for the scrapping of the property joint venture, market observers believe that the decision reflects a broader trend. In December, brewer and pub company Greene King also pulled a planned opco/propco split as a result of the credit crunch and in January, French supermarket group Carrefour scrapped plans to list its €20 billion property assets.

"Being a property company is certainly less fashionable than it was 12 to 18 months ago and it would be little surprise if we saw a decline in the number of non-real estate companies that chose to separate into operating and property companies in the short term," says John Perry, head of pan-European real estate research at Deutsche Bank in London.

According to Mitchells & Butlers, the interest rate and inflation hedges were a requirement from banks underwriting the junior debt and also necessary to achieve the required ratings on the senior debt that was to fund the joint venture with R20. Mitchells & Butlers and R20 also entered into separate hedges that were meant to contribute to the joint venture and underpin it, according to a statement.

On the banks’ advice, all the hedges were put in place a fortnight before the planned announcement date of the joint venture. But before the debt package could be finalized, the sub-prime crisis began to morph into a credit crunch and the banks withdrew funding – leaving Mitchells & Butlers and R20 with hedges against a non-existent deal.

Ultimately Mitchells & Butlers’ management must take the blame for the debacle. It was Mitchells & Butlers’ management that decided not to close out the hedges when funding was withdrawn. On July 31 2007, the hedges would have resulted in a loss of £60 million; by September 27, that mark-to-market loss was £140 million; and by November 29 it had reached £155 million. Despite clear signals that the availability of debt was not likely to improve in the short term, Mitchells & Butlers kept the hedges on, only closing them out when the position was clearly hopeless on January 29 at a cost of £274 million, an increase in gearing from 61% to 67% and a reduction in post-tax earnings of around £13 million for the current financial year.