Mitchells & Butlers PLC
29 January 2008
29 January 2008
Hedge Closure, Strategy and Trading Update
Mitchells & Butlers announces that following a recent and rapid deterioration in
the mark-to-market deficit on the hedges taken out in connection with last
year's proposed property joint venture, and with no near term prospect of debt
markets permitting a property-based transaction, it has closed out in cash the
hedges no longer required at a cost of £274m post tax. The Board intends to
conduct a strategic review for value creation in parallel with the management
focus on ensuring continued operational out-performance from the integrated
business to capitalise further on the Company's position of competitive
- Resilient performance in a challenging trading environment: same outlet
like-for-like sales up 0.7% in first 17 weeks
- Strong market share gains: same outlet food sales up 4.6%, drink declines
limited to 1.1%
- Continued growth in Scotland during second year of smoking ban; same outlet
sales up 4.4% in first 17 weeks
Background to Hedges
Following a rigorous review of its property assets, which included extensive
consultation with shareholders during the first half of 2007, Mitchells &
Butlers pursued a joint venture transaction in order to liberate shareholder
value. R20, an investment company owned by Robert Tchenguiz, had made the most
attractive offer to participate in this OpCo/PropCo structure.
As previously announced last August, Mitchells & Butlers and R20 were in final
negotiations with banks in July 2007 to put in place a financial package for the
proposed joint venture, aimed at maximising shareholder returns. 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. Following
receipt of written 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 process was started in mid-July, two weeks before
the planned announcement date of the transaction. This was on the banks' advice
that the hedging could take some time to execute given the relatively low
liquidity of the inflation swaps market.
Whilst the details of the debt package were being finalised with the banks,
there was a material adverse change, with debt market conditions suddenly
deteriorating in late July and the credit-approved debt terms from the banks
were withdrawn. This left Mitchells & Butlers and R20 with hedge instruments in
place but unable to fund the transaction.
Retention of Hedges
General expectations in the Autumn were that the disruption in the debt markets
would be temporary. The Board received bank advice that an OpCo/PropCo
transaction, if scaled back from the original debt levels, should be capable of
execution. The evidence at the time continued to suggest that significant value
could still be captured for shareholders by such a structure.
In November, Mitchells & Butlers received a proposal from R20 for a partial
underwriting of a demerged REIT structure which the Board believed it should
evaluate, as announced at the time of the Preliminary Results last year.
However, during December, as the credit crunch worsened, it became clear that
even the most modest debt package required for a REIT structure could not be
secured then and the future prospects for such debt raising have deteriorated
further in January.
As a result, there appears little prospect in the near term of market conditions
permitting the delivery of such a structure on attractive terms that would
create material value for shareholders.
Closure of Hedges
In December and early January, the mark-to-market deficit on the hedges
continued to be volatile but not materially different from the post-tax loss of
£180m previously reported. However, the more recent instability in the financial
markets led to a further sharp deterioration in the position. In these
circumstances, maintaining the hedge position to utilise in a property-based
transaction, which was now highly unlikely to occur in the near future, became a
risk that could no longer be justified despite the challenge of exiting in an
illiquid market. As a result, the inflation hedges and the interest rate swaps
no longer required have been terminated at a total cost of £274m after tax. A
portion of the interest rate swaps will be retained to cover some £300m of debt
outside the securitisation as this will form part of the Company's core long
term debt structure. The latest mark-to-market deficit to income on these swaps
was approximately £22m post tax.
The settlement of the hedges will be funded from a bank facility specifically
set up for this purpose and is expected to take the Company's balance sheet
gearing, on a proforma basis, to approximately 67%, compared to 61% reported at
the year-end. The additional debt cost resulting from the closure of the hedges
is expected to reduce post tax earnings by approximately £13m in the current
financial year, of which £4m will be incurred in the first half.
At the end of last financial year, an exceptional accounting loss of £155m post
tax was booked in respect of the hedges. The above settlement of the majority of
the hedges results in a further £119m post tax exceptional loss which will be
taken in the current year.
Management, supported by advisers and the Board, acted professionally and
diligently in the preparation of the financial package for the proposed joint
venture with R20 and the subsequent retention of the hedge, but fell victim to
the global credit crunch which began in the midst of the final execution of the
transaction. Nevertheless, in light of the cash loss incurred, the Finance
Director, Karim Naffah, has tendered his resignation, which has been accepted.
He will leave Mitchells & Butlers by mutual agreement.
The Chief Executive, Tim Clarke, also tendered his resignation, however this was
declined as the Board believes it is in the best interests of the Company that
he should continue to lead the operational out-performance of the business.
Jeremy Townsend, currently Deputy Finance Director, will be appointed to the
Board as Finance Director.
All executive directors, including Mr Naffah, will forego their 2007 bonus
awards in recognition of the large loss suffered by the Company from the hedge
STRATEGY AND BOARD COMPOSITION
The Board remains committed to the goal of further developing Mitchells &
Butlers as the market leader in the managed pub sector, and maximising
The pub sector is facing some of the strongest challenges it has encountered for
many years. In this context, we believe the current emphasis must be on managing
the business to maximise profitability and capitalise on our position of
competitive strength. To that end, management will focus on the delivery of
operational out-performance, through further market share gains, cost reduction
and strengthening the balance sheet by disciplined cash and asset management.
The Board remains committed to value creation and would, if market conditions
recovered sufficiently, seek a structure which successfully demonstrates the
full value of the property whilst underpinning the robustness of the operating
In the interests of providing full and transparent information to investors, we
believe it is appropriate to reflect more explicitly the component parts of the
operating and property elements within the integrated business. Since the
Preliminary Results, we have moved to regular revaluations of our property and
will continue to monitor and report the open market rental levels for all of our
freehold and long leasehold property.
To add to the Board's property expertise we will seek to appoint a non-executive
director with specialist property knowledge.
In the absence of a property transaction, the Board will undertake a review of
strategic options for value creation. This will be pursued in parallel with the
management focus on delivery of operational performance to capitalise further on
the company's position of competitive strength.
Trading has continued to be resilient in a very challenging environment with
same outlet like-for-like sales growth for the first 17 weeks up 0.7% on the
comparable period last year. This reflects substantial market share gains
against the background of the adverse impact of the first winter of trading
since the start of the smoking ban in England and Wales. Since the update at the
end of November the trading pattern was: a weak first three weeks of December;
strong trading over the Christmas and New Year break; followed by a satisfactory
January to date, resulting in like-for-like sales up 0.2% over the last 10
Our Residential pubs same outlet like-for-like sales in the 17 week period were
up 0.8% which includes an uplift in Vintage Inns sales as a result of the new
menus and our margin reinvestment strategy. On the High Street same outlet
like-for-likes were up 1.0% with Central London remaining in good growth.
Food sales have been strong with same outlet like-for-likes up 4.6% in the 17
weeks reflecting a further increase in the number of consumers being attracted
by the quality and value of our pub food offers. In drinks, our market share
gains have accelerated in the face of on-trade beer market volume declines of
approximately 9% over the period*, with our same outlet like-for-like drink
sales decline limited to 1.1%. The divergent trajectory of these product
categories is in line with our experience during the first winter of the smoking
ban in our Scottish pubs.
In the 30 weeks since the introduction of the smoking ban in England, same
outlet like-for-like sales for our English pubs not previously converted to
non-smoking have increased by 0.6%, with food sales up 4.9% and drink sales down
1.0%. The trading in our Scottish estate continues to show good growth in the
second year of the ban with same outlet like-for-like sales in the first 17
weeks of this financial year up 4.4%.
The Acquired Sites conversion programme has been rapidly executed and will be
completed by the half-year with 181 pubs now converted to our brands and
formats. In the more difficult consumer environment, average weekly sales
uplifts on these converted sites are running at approximately 17% above the
levels at which the pubs were acquired and we will continue to develop the
trading performance of these pubs to deliver our year three target of 30% sales
uplifts in the 2009 financial year.
We remain cautious on the outlook for consumer spending and in particular, the
near term prospects for the on-trade beer market. Against that background our
strong food sales growth and substantial drinks market share gains reflect our
competitive focus on amenity, service and value. However, the smoking ban has
accelerated the shift in the sales mix to food which is having an adverse impact
on gross margins. In addition, rising food inflation continues to put upward
pressure on costs. To offset the impact of these pressures, strong management
action is being taken to reduce both fixed and variable operating costs by some
£20m although even with the implementation of these plans it will be challenging
to maintain fully net Retail margins for the year, particularly in the first
The evidence from Scotland was that the first winter of the smoking ban in our
business saw the bulk of the loss in beer and machines sales, followed by
sustained growth in sales of food, soft drinks and wine.
The quality of our estate, the competitive strengths of our brands and formats,
our leading position in the eating out market and our value for money offers are
generating substantial market out-performance and we expect continuing strong
market share gains with improved prospects after the 1 July anniversary of the
As a result of the actions being taken to drive sales and reduce costs, we
expect a resilient Retail operating performance for the year as a whole against
trading conditions which are set to remain highly challenging. Whilst the cash
loss from the hedges, which the Board very much regrets, will impact earnings in
the current year, the competitive operational out-performance of the business
continues to strengthen.
This announcement is Mitchells & Butlers' Interim Management Statement for the
17 week trading period to 26 January 2008. We will announce Interim Results for
the 28 weeks to 12 April 2008 on 20 May.
* Industry data for October to December
There will be a conference call for analysts and investors at 9.00am; please
dial +44(0) 207 162 0025. The replay will be available until 5 February 2008 on
+44(0) 207 031 4064, passcode 782762.
Appendix: Like-for-like sales
17 weeks ended Same outlet like-for-like Uninvested like-for-like
26 January 2008 sales growth sales growth
Residential 0.8% (1.4)%
High Street 1.0% 0.4%
Total 0.7% (1.0)%
Note: These results include the Acquired Sites
For further information, please contact:
Erik Castenskiold 0121 498 6513
Kathryn Holland 0121 498 4526
James Murgatroyd (Finsbury Group) 0207 251 3801
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 over three times greater than that of the average UK pub.
- Mitchells & Butlers' leading portfolio of brands and formats includes Ember
Inns, Harvester, Sizzling Pub Co., Toby Carvery, Vintage Inns, All Bar One,
O'Neill's, Nicholson's and Browns. In addition, Mitchells & Butlers operates a
large number of individual city centre and residential pubs.
- Jeremy Townsend joined the Company in June 2005 as Deputy Finance Director. He
was previously employed by J Sainsbury plc where he held various finance roles
including Group Financial Controller, Corporate Finance Director and Strategy
Director. Prior to Sainsbury's, he was employed by Ernst & Young working in
audit and corporate finance. Jeremy is a Fellow of the Institute of Chartered
Accountants of England and Wales.
- The "Acquired Sites" are the pub restaurant sites purchased from Whitbread plc
in July 2006.
- Same outlet like-for-like sales include the sales performance for the
comparable period in the prior year of all managed pubs that were trading for
the two periods being compared. For the 17 weeks to 26 January 92% of the
estate is included in this measure.
- Uninvested like-for-like sales include the sales performance for the
comparable period in the prior year of those managed pubs that have not
received expansionary investment of more than £30,000 in the two periods being
compared. For the 26 weeks to 26 January 82% of the estate is included in this
This information is provided by RNS
The company news service from the London Stock Exchange