On Monday UK property investor Robert Tchenguiz upped his stake in Mitchells & Butlers by 3 per cent to 22 per cent, spending about £46m in the process. On Tuesday the pubs operator revealed a highly embarrassing £274m post-tax loss related to the closing out of hedges put in place as part of an abortive JV last summer with the very same property entrepreneur.
Somewhat ironically, before the losses were announced, one UK daily paper was suggesting that Tchenguiz’s purchase of a further 12m M&B shares, via contracts for difference, was motivated by a desire to see off speculation that he is in “dire financial straits”. And perhaps to reassert himself as having that magic investment touch?
Tchenguiz has reportedly seen millions wiped off the value of his investments in companies including Sainsbury, M&B and SCi Entertainment in the recent sell off. M&B shares have lost more than half their value since peaking last summer on the back of plans to maximise the value of its pub properties, a move spurred on by the presence of Tchenguiz’ R20 on the shareholder register.
Alas, it was not to be. The credit squeeze put paid to the scheme, which involved placing M&B’s properties into a 50-50 JV, gearing up the vehicle and returning £1bn to shareholders.
The troublesome hedges were taken out in the final stages of talks last July on interest rates and inflation as part of negotiations on the financing with the banks. They were also required to achieve a sufficiently high rating from the rating agencies on the senior debt to be issued. But the squeeze last summer left M&B holding the hedges but with no financing, and no deal.
The hedges were kept on in case an alternative OpCo/PropCo deal were possible. But even the more modest debt levels required for demerging its property into a real estate investment trust proved impossible and now with “no near term prospect” of the debt markets allowing such a transaction, M&B has given in, closed its hedges and taken a £274m hit, above and beyond the £180m previously reported. It has also as a result waved goodbye to its finance director Karim Naffah.
Chief executive Tim Clarke offered his resignation as a result of the blunder – which was declined – and all executive directors will give up their 2007 bonuses as a result of the losses.
What a mess. Though M&B, which refers throughout its statement to its “advisers”, might feel a touch aggrieved. It couldn’t have predicted the rapid closing of the credit markets which put paid to its (well-received) property plans. The equity market was in the first place insistently championing a scheme to realise the value in its property – which perhaps serves to explain why it kept those hedges in place so long in the hope that such a scheme would become viable.
For the record, M&B counts as its brokers JPMorgan Cazenove and Merrill Lynch, while Citi provided financial advice to the company.
But is this more bad news for Robert Tchenguiz? It has been suggested that he should stick to his property roots and abandon his seemingly ill-fated forays into M&A – notably the failed bid for Sainsbury last year.
The market though might have other ideas. Despite the losses, M&B shares were up about 2 per cent in early London trade. Sentiment has shifted away from the idea of highly geared property adventures – and towards bog-standard operational delivery. And with M&B down at 390p, versus last year’s high of 898p, the perennial takeover play could be back in focus.