21st Jul 2006 07:01
Mitchells & Butlers PLC21 July 2006 Mitchells & Butlers plc Acquisition of 239 pub restaurant sites from Whitbread PLC and update on return of funds Acquisition Highlights - 239 high quality largely freehold pub restaurant sites acquired for £497m including up to £7m of contingent deferred consideration- Accelerates Mitchells & Butlers' repositioning to high growth food markets- Opportunity for substantial sales uplifts generating over 50% increase in outlet EBITDA- Highly value creative: - Expected to be significantly earnings enhancing from year 2*; and marginally dilutive in year 1* - Returns expected to exceed WACC during year 2*, and continue to build thereafter - Expected EBITDA multiple of approximately 8x post conversion Update on Return of Funds - The Board continues to expect to return of the order of £500m to shareholders, following completion of the current refinancing. Commenting on the transaction, Tim Clarke, Chief Executive said: "With this transaction, we have secured 239 of the best pub restaurant sites inthe UK; as defined by their locations, their scale, and above all their salesand profits potential. The acquisition represents exceptional value comparedwith greenfield site developments. The conversion of these sites to our brandsand formats will enable us to create substantial shareholder value from thisacquisition and accelerate Mitchells & Butlers' growth." "Not withstanding this acquisition it is very pleasing to confirm that we arestill expecting to return of the order of £500m to shareholders." Details of the Transaction Mitchells & Butlers has agreed the acquisition of 235 pub restaurants and 4 pubrestaurants under development (the "Acquired Sites") put up for sale byWhitbread PLC ("Whitbread") earlier this year. The Acquired Sites are amongst the best pub restaurant sites in the UK by virtueof their locations, scale, and demographics. The sites are in residential areas,95% are freehold or long leasehold and approximately half are in the highergrowth regions of the South East and South West of the UK. Consideration and Funding Consideration for the acquisition is £490m most of which will be settled in cashon completion on 28 July 2006. In addition, Mitchells & Butlers has agreed tomake a further payment of up to £7m to Whitbread, by way of deferredconsideration contingent upon the outcome of certain tax clearances. Fees andstamp duty of £12m are estimated on the transaction. The acquisition has been funded by a short term bank facility provided by theRoyal Bank of Scotland. Acquisition Rationale - Accelerates Mitchells & Butlers' repositioning towards higher growth eating out market The Board of Mitchells & Butlers' believes that this acquisition is an importantopportunity to accelerate the repositioning of the Mitchells & Butlers estatetowards the eating out market which has seen 4% real growth per annum over thelast 20 years. Following the acquisition and successful completion of theconversion to Mitchells & Butlers' brands and formats, it is anticipated thatthe food sales mix of the enlarged estate will be approaching 40%. - Opportunity for substantial sales and profits uplifts through conversion to Mitchells & Butlers' brands and formats The strength of Mitchells & Butlers' brands and formats, together withoperational skill in brand development and evolution has driven average weeklysales of £21k per week from Mitchells & Butlers' pub restaurants (excludingthose pub restaurants with adjacent lodges) compared to £16k generated by theAcquired Sites over a similar period. As a result, the Board believes that thereis a significant opportunity to increase the sales and profits of the AcquiredSites. Extensive due diligence, rigorous site appraisals and detailed plans havealready been formulated to debrand within 12 months and convert the vastmajority of the pubs acquired to Mitchells & Butlers' brands and formats overthe next 2 years. These include Harvester, Premium Country Dining, Toby andVintage Inns pub restaurants and Ember Inns and Sizzling Pub Co pub formats.Expansionary investment of around £85m is anticipated over the next 2 yearsgenerating high incremental returns. To accommodate these conversions, theinvestment programme in the existing estate will be scaled back to bring thetotal expansionary capital expected for next year to around £110m. - Margin enhancement through scale, improved productivity and purchasing benefits Mitchells & Butlers has consistently delivered improvements in employeeproductivity, holding the employment cost ratio constant as a percentage ofsales for the company as a whole since 2003 despite the 20% increase in thenational minimum wage. Key to this achievement has been the generation of highfood cover volumes and capacity management skills based on staff training,deployment scheduling and sales forecasting. Relative to Mitchells & Butlers'pub restaurants, employment costs are significantly higher in the AcquiredSites, reinforcing our confidence in our ability to generate high returns postconversion. The growth in food sales has allowed Mitchells & Butlers to make materialpurchasing gains while at the same time improving the quality offered to thecustomer. The Acquired Sites provide a further opportunity for scale benefitsthrough additional volume for the enlarged group. The Board believes thatpurchasing benefits of £5m per annum are available from year 2. - Quality of Acquired Sites and materially higher trading potential provides significant opportunity to create value The Board is confident that the quality of the Acquired Sites, together with thestrength of Mitchells & Butlers' brands and formats and its operating procedureswill create significant value for shareholders. The acquisition is expected togenerate returns above Mitchells & Butlers' WACC (which the Board estimates tobe approximately 6%) during year 2 and build strongly thereafter followingcompletion of the conversion programme. The acquisition is expected to bemarginally earnings dilutive in the first year and significantly enhancingthereafter. Transitional Arrangements To maintain the operational focus and accountability of the trading performanceof the Acquired Sites pending their conversion and transfer to the Restaurantsand Pubs & Bars divisions, Adam Fowle, currently director of BusinessDevelopment and previously MD of the Pubs & Bars division, will oversee theintegration and manage the pubs until they are converted. Additional overheadsof £4m are anticipated in the first year, reducing to £2m per annum thereafter.One off integration costs of £9m, predominantly related to IT transfer costs,are anticipated in year 1. As part of the transaction, Mitchells & Butlers has entered into a TransitionalServices Agreement with Whitbread for a period up to February 2007 under whichWhitbread will continue to provide certain services such as IT and accountingsupport to the Acquired Sites. Mitchells & Butlers has also entered into aLicence Agreement with Whitbread under which the Acquired Sites can continue totrade as Beefeater and Out & Out for up to 7 months and Brewers Fayre for 12months. Financial Information on the Acquired Sites The aggregate net book value of the Acquired Sites, included in the consolidatedbalance sheet of Whitbread as at 1st March 2006, was £281m. The Acquired Sitesmade a profit contribution before allocation of overhead and before interest andtax of £38m in the year ended 1st March 2006. Uncertainty over the future ofthese pubs means that they have been trading less strongly. Turnover and EBITDAin the 12 months to 1 June 2006 were £194m and £45m respectively. Refinancing, Disposals and Return of Funds The refinancing of the existing business announced in April 2006 is on track tobe completed before the end of the current financial year, although the precisequantum to be raised will inevitably be subject to conditions in the debtmarkets. In addition, we remain confident in our ability to raise at least £70m from thedisposal of individual pubs this year and we have additionally decided tosolicit third party offers on approximately 100 smaller, drinks-led pubs. £32m of the £59m share buyback targeted for the second half of the year has nowbeen completed with 6.7m shares repurchased since the interims. On the assumption that we are successful in executing our refinancing plans, andthe disposals mentioned above yield the proceeds that we currently anticipate,the Board is confident that, not withstanding the successful acquisition of theAcquired Sites, it will continue to be possible to return of the order of £500mto shareholders by the end of the calendar year, including the second half sharebuyback. Further details will be provided in due course. Pre Close Trading Update An update on trading will be provided with Mitchells & Butlers pre close tradingstatement on 26 September 2006. The Board remains confident that the results forthe year will be in line with their expectations. * Before exceptional items and the potential impact of fair value accountingadjustments For further information please contact: Investor Relations:Kate Holligon 0121 498 5092 Media:James Murgatroyd (Finsbury Group) 0207 251 3801 There will be a presentation for analysts and fund managers at 9.30 am at theMerrill Lynch Financial Centre, 2 King Edward St, EC1. A live webcast of thepresentation will be available on www.mbplc.com. Notes for editors: Mitchells & Butlers owns and operates around 2,000 high quality pubs in primelocations nationwide. The Group's predominantly freehold, managed estate isbiased towards large pubs in residential locations. With around 3% of the pubsin the UK, Mitchells & Butlers has 10% of industry sales, and average weeklysales per pub of over three times the industry average. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This announcement contains certain forward-looking statements as defined underUS legislation (section 21E of the Securities Exchange Act of 1934) with respectto the financial condition, results of operations and business of Mitchells &Butlers and certain of the plans and objectives of the Board of Directors withrespect thereto. These forward-looking statements can be identified by the factthat they do not relate only to historical or current facts. Forward-lookingstatements often use such words as 'will', 'should', 'continue', 'anticipate','target', 'expect', 'estimate', 'intend', 'plan', 'goal', 'believe' or otherwords of similar meaning. The forward-looking statements contained herein arebased on assumptions and assessments made by Mitchells & Butlers' management inlight of their experience and their perception of historical trends, currentconditions, expected future developments and other factors they believe to beappropriate. By their nature, forward-looking statements are inherentlyspeculative and involve risk and uncertainty, and there are a number of factorsthat could cause actual results and developments to differ materially from thoseexpressed in or implied by such forward-looking statements. These factorsinclude, but are not limited to: the future balance between supply and demandfor Mitchells & Butlers' sites; the effect of economic conditions and unforeseenexternal events on Mitchells & Butlers' business; the availability of suitableproperties and necessary licenses; consumer and business spending, changes inconsumer tastes and preference; levels of marketing and promotional expenditureby Mitchells & Butlers and its competitors; changes in the cost and availabilityof supplies; key personnel and changes in supplier dynamics; significantfluctuations in exchange rates, interest rates and tax rates; the availabilityand effects of any future business combinations, acquisitions or dispositions;the impact of legal and regulatory actions or developments; the impact of theEuropean Economic and Monetary Union; the ability of Mitchells & Butlers tomaintain appropriate levels of insurance; the maintenance of Mitchells &Butlers' IT structure; competition in markets in which Mitchells & Butlers'operates; political and economic developments and currency exchangefluctuations; economic recession; management of Mitchells & Butlers'indebtedness and capital resource requirements; material litigation againstMitchells & Butlers; substantial trading activity in Mitchells & Butlers'shares; the reputation of Mitchells & Butlers' brands; the level of costsassociated with leased properties; competition for high quality managers;declining sales of beer in pubs in the UK; food safety scares; fundingliabilities in respect of the Group's pension schemes and the weather. No statement in this announcement is intended to be a profit forecast or toimply that the earnings per share of Mitchells & Butlers for the current orfuture financial years will necessarily match or exceed the historical orpublished earnings of Mitchells & Butlers. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Mitchells & ButlersWhitbread