Update on hedge position
Mitchells & Butlers, noting press comment yesterday, states that the post tax impact of marking-to-market the company's share of the hedges, entered into in the summer when the transaction with R20 was about to be implemented, was a deficit of approximately £140m as at 13 September 2007. This does not represent a cash loss and compares with a post-tax deficit of £60m as at 31 July 2007, as reported on 2 August 2007 when the Board of Mitchells & Butlers concluded that the joint venture with R20 was unlikely to be achieved until debt markets have improved.
Background to hedge transaction
Until the recent market turbulence, Mitchells & Butlers and R20 were in final negotiations with banks to finance the transaction. Putting in place hedges on interest rates and inflation rates was a fundamental requirement of the banks to underwrite the junior debt facility and to achieve the appropriate ratings from the rating agencies on the senior debt. On the assurance of credit-approved debt terms from the banks, Mitchells & Butlers and R20 separately entered into a number of debt hedging arrangements intended to be contributed to the joint venture, to underpin the delivery of a successful transaction. The sudden rapid deterioration in debt market conditions meant that the transaction could not be implemented.
Drivers of valuation and accounting treatment
Mitchells & Butlers' hedges include interest rate swaps and inflation swaps. Marking-to-market against current values, the latest deficit on these hedges reflects the combined effect since July, of reduced long term interest rates and higher long-term inflation expectations brought about by the recent instability of the debt market. The impact of marking-to-market on the inflation hedge in particular has been exacerbated by sharply reduced liquidity in the market for such instruments under present market conditions.
The carrying value of the debt hedging arrangements as at the year end date will, for accounting purposes, be treated as an exceptional item in the company's accounts. An accounting deficit would not reflect a cash loss to the business, as the hedges will not have been closed out as they are expected to be utilised in a future property based re-financing.
The Board continues to believe that substantial value can be released to shareholders through the creation by Mitchells & Butlers of a dedicated property company structure and discussions are continuing with banks to implement a transaction on acceptable financing terms once the debt markets have stabilised.
On 27 September, Mitchells & Butlers will issue a pre-close trading update for the year ending 29 September 2007. Trading results for the current year are expected to be at the upper end of the Board's expectations.
For further information, please contact:
Investor Relations: 0121 498 4907
Media 0121 498 4526
Kathryn Holland 020 7251 3801
James Leviton (Finsbury Group)
Notes for editors:
Mitchells & Butlers owns and operates around 2,000 high quality pubs in prime locations nationwide. The Group's predominantly freehold, managed estate is biased towards large pubs in residential locations. With around 3% of the pubs in the UK, Mitchells & Butlers has 10% of industry sales, and average weekly sales per pub of over three times the industry average.