Punch Taverns Offers to Acquire Mitchells & Butlers

Punch Taverns Offers to Acquire Mitchells & Butlers

Feb. 4 (Bloomberg) -- Punch Taverns Plc, the largest U.K. pub owner by outlets, offered to buy Mitchells & Butlers Plc for 2 billion pounds ($4 billion) to more than double sales as consumer spending slows and a smoking ban hurts earnings.

Punch, based in Burton-on-Trent, England, said each company's investors would control 50 percent of the combined business. Mitchells and Punch had market values of 1.8 billion pounds ($3.6 billion) and 1.9 billion pounds, respectively, at last week's close. Shareholders in Mitchells & Butlers would also get 175 million pounds in cash, Punch said today.

The purchase would increase Punch's pubs by 24 percent to 10,400 and add the All Bar One and O'Neill's brands. Mitchells & Butlers, whose roots date to the 19th century, fell 40 percent last year in London trading after shelving plans to sell pubs to a venture with billionaire property investor Robert Tchenguiz. Tchenguiz owns 23 percent of Mitchells and may make a competing bid, the Financial Times has said.

``The proposed deal offers speed, deliverability and a small cash payment,'' said Mark Brumby, an analyst at Blue Oar Securities in London. However, ``a merger with Punch would not provide M&B's shareholders with the two things that they arguably most desire, an exit and a premium price,'' he said.

Mitchells said it will consider the offer as well as ``continued expressions of interest'' from other bidders. The company last week posted a 274 million-pound loss on hedges tied to the failed property transaction with Tchenguiz.

A spokesman for Tchenguiz declined to comment today.

Punch Falls

Punch slid 51.5 pence, or 7.2 percent, to 662 pence at 11:30 a.m. in London trading, reversing an earlier gain. Mitchells jumped as much as 8.7 percent and was up 9.75 pence, or 2.2 percent, to 460 pence.

Mitchells had sales of 1.9 billion pounds in its last fiscal year, exceeding Punch's 1.7 billion pounds. Punch still has more than four times Mitchells' pubs, with about 8,400 to Mitchells' 2,000.

The offer from Punch was all-stock, according to a Sunday Telegraph report yesterday. Buyout firms TPG Inc., CVC Capital Partners Ltd., Cinven Ltd. and Apax Partners Worldwide LLP have also told Mitchells they're interested, the FT said Feb. 1.

Tchenguiz aims to increase his stake to 29.9 percent, the most permitted without a requirement to make a bid under U.K. regulations, the FT has said. The newspaper also said he wants to make an offer for the company with a private-equity partner.

Pub Takeovers

``Tchenguiz and others on the share register will exert upward pressure on the price,'' said Paul Hickman, an analyst at KBC Peel Hunt in London. Cost savings from a deal would be limited at first because Mitchells has twice as many managed pubs, so Punch would need to invest in infrastructure, he said.

A combination of Punch and Mitchells would have about 3,000 pubs that would be company-run rather than leased to tenants.

Punch overtook Enterprise Inns Plc as the largest U.K. pub operator when it bought Spirit Group Ltd. in 2005 for 1.43 billion pounds and 1.25 billion pounds of debt. Enterprise's biggest acquisition was buying 1,860 outlets from Laurel Pub Holdings Ltd. for 875 million pounds in 2002.

Punch sold more than 400 Spirit pubs after the acquisition, and in 2006 was pressured by shareholders to exit the managed- pub business by selling outlets or converting them to leased pubs. Income from pubs companies manage themselves is less steady than the rental payments from leased properties.

``The price looks relatively generous, given we see few alternative bidders emerging,'' said Dresdner Kleinwort analyst Tim Ramskill in a note today. ``Private equity would likely struggle to raise debt financing and has no scope for synergy capture.'' Punch could get cost savings of 85 million pounds from the deal, he said.

Rival Bidders?

Rival pub operators are probably prevented from making bids by being either too small, such as Greene King Plc with its market capitalization of 1 billion pounds, or run in a different way to Mitchells, Ramskill said, citing Enterprise Inns, which only leases pubs to tenants.

There is no certainty an offer will be made, Punch said today. Goldman Sachs Group Inc. and Morgan Stanley are advising Punch, while Citigroup Inc. is advising Mitchells & Butlers.

Punch said Chief Executive Officer Giles Thorley would keep his role after a merger, as would Punch Chief Financial Officer Phil Dutton. Mitchells CEO Tim Clarke would become chairman of the merged company, with Punch Chairman Peter Cawdron becoming deputy chairman.

Mitchells History

The present Mitchells & Butlers was created when Six Continents Plc, formerly known as Bass Plc, split its bar and hotel businesses in 2003. Bass, which opened its first brewery in 1777, merged with the former Mitchells & Butlers in 1961.

Mitchells & Butlers developed large-scale, urban landmark venues in the first half of the 20th century to appeal to more affluent drinkers that had been put off by the small, backstreet pubs predominant in Victorian Britain, according to the company's Web site. In 1994, Bass introduced the Irish-themed O'Neill's chain. The first All Bar One, a chain designed to appeal to women, also opened that year.

Executives from Mitchells & Butlers apologized to investors at last week's annual meeting after disclosing the size of the hedging loss. Some private shareholders called on Clarke and the company's board to resign.

BLOOMBERG