29th Jan 2008 07:01
Mitchells & Butlers PLC29 January 2008 29 January 2008 Hedge Closure, Strategy and Trading Update Mitchells & Butlers announces that following a recent and rapid deterioration inthe mark-to-market deficit on the hedges taken out in connection with lastyear's proposed property joint venture, and with no near term prospect of debtmarkets permitting a property-based transaction, it has closed out in cash thehedges no longer required at a cost of £274m post tax. The Board intends toconduct a strategic review for value creation in parallel with the managementfocus on ensuring continued operational out-performance from the integratedbusiness to capitalise further on the Company's position of competitivestrength. TRADING HIGHLIGHTS - 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 HEDGE INSTRUMENTS Background to Hedges Following a rigorous review of its property assets, which included extensiveconsultation with shareholders during the first half of 2007, Mitchells &Butlers pursued a joint venture transaction in order to liberate shareholdervalue. R20, an investment company owned by Robert Tchenguiz, had made the mostattractive offer to participate in this OpCo/PropCo structure. As previously announced last August, Mitchells & Butlers and R20 were in finalnegotiations with banks in July 2007 to put in place a financial package for theproposed joint venture, aimed at maximising shareholder returns. Putting inplace hedges on interest rates and inflation rates was a fundamental requirementof the banks to underwrite the junior debt facility and to achieve theappropriate ratings from the rating agencies on the senior debt. Followingreceipt of written credit-approved debt terms from the banks, Mitchells &Butlers and R20 separately entered into a number of debt hedging arrangementsintended to be contributed to the joint venture, to underpin the delivery of asuccessful transaction. The process was started in mid-July, two weeks beforethe planned announcement date of the transaction. This was on the banks' advicethat the hedging could take some time to execute given the relatively lowliquidity 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 suddenlydeteriorating in late July and the credit-approved debt terms from the bankswere withdrawn. This left Mitchells & Butlers and R20 with hedge instruments inplace but unable to fund the transaction. Retention of Hedges General expectations in the Autumn were that the disruption in the debt marketswould be temporary. The Board received bank advice that an OpCo/PropCotransaction, if scaled back from the original debt levels, should be capable ofexecution. The evidence at the time continued to suggest that significant valuecould still be captured for shareholders by such a structure.In November, Mitchells & Butlers received a proposal from R20 for a partialunderwriting of a demerged REIT structure which the Board believed it shouldevaluate, as announced at the time of the Preliminary Results last year.However, during December, as the credit crunch worsened, it became clear thateven the most modest debt package required for a REIT structure could not besecured then and the future prospects for such debt raising have deterioratedfurther in January. As a result, there appears little prospect in the near term of market conditionspermitting the delivery of such a structure on attractive terms that wouldcreate material value for shareholders. Closure of Hedges In December and early January, the mark-to-market deficit on the hedgescontinued to be volatile but not materially different from the post-tax loss of£180m previously reported. However, the more recent instability in the financialmarkets led to a further sharp deterioration in the position. In thesecircumstances, maintaining the hedge position to utilise in a property-basedtransaction, which was now highly unlikely to occur in the near future, became arisk that could no longer be justified despite the challenge of exiting in anilliquid market. As a result, the inflation hedges and the interest rate swapsno longer required have been terminated at a total cost of £274m after tax. Aportion of the interest rate swaps will be retained to cover some £300m of debtoutside the securitisation as this will form part of the Company's core longterm debt structure. The latest mark-to-market deficit to income on these swapswas approximately £22m post tax. The settlement of the hedges will be funded from a bank facility specificallyset up for this purpose and is expected to take the Company's balance sheetgearing, on a proforma basis, to approximately 67%, compared to 61% reported atthe year-end. The additional debt cost resulting from the closure of the hedgesis expected to reduce post tax earnings by approximately £13m in the currentfinancial year, of which £4m will be incurred in the first half. At the end of last financial year, an exceptional accounting loss of £155m posttax was booked in respect of the hedges. The above settlement of the majority ofthe hedges results in a further £119m post tax exceptional loss which will betaken in the current year. Management Change Management, supported by advisers and the Board, acted professionally anddiligently in the preparation of the financial package for the proposed jointventure with R20 and the subsequent retention of the hedge, but fell victim tothe global credit crunch which began in the midst of the final execution of thetransaction. Nevertheless, in light of the cash loss incurred, the FinanceDirector, 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 wasdeclined as the Board believes it is in the best interests of the Company thathe should continue to lead the operational out-performance of the business. Jeremy Townsend, currently Deputy Finance Director, will be appointed to theBoard as Finance Director. All executive directors, including Mr Naffah, will forego their 2007 bonusawards in recognition of the large loss suffered by the Company from the hedgeclosure. 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 maximisingshareholder value. Management Focus The pub sector is facing some of the strongest challenges it has encountered formany years. In this context, we believe the current emphasis must be on managingthe business to maximise profitability and capitalise on our position ofcompetitive strength. To that end, management will focus on the delivery ofoperational out-performance, through further market share gains, cost reductionand strengthening the balance sheet by disciplined cash and asset management. Property The Board remains committed to value creation and would, if market conditionsrecovered sufficiently, seek a structure which successfully demonstrates thefull value of the property whilst underpinning the robustness of the operatingbusiness. In the interests of providing full and transparent information to investors, webelieve it is appropriate to reflect more explicitly the component parts of theoperating and property elements within the integrated business. Since thePreliminary Results, we have moved to regular revaluations of our property andwill continue to monitor and report the open market rental levels for all of ourfreehold and long leasehold property. To add to the Board's property expertise we will seek to appoint a non-executivedirector with specialist property knowledge. Strategic Options In the absence of a property transaction, the Board will undertake a review ofstrategic options for value creation. This will be pursued in parallel with themanagement focus on delivery of operational performance to capitalise further onthe company's position of competitive strength. CURRENT TRADING Trading has continued to be resilient in a very challenging environment withsame outlet like-for-like sales growth for the first 17 weeks up 0.7% on thecomparable period last year. This reflects substantial market share gainsagainst the background of the adverse impact of the first winter of tradingsince the start of the smoking ban in England and Wales. Since the update at theend 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 satisfactoryJanuary to date, resulting in like-for-like sales up 0.2% over the last 10weeks. Our Residential pubs same outlet like-for-like sales in the 17 week period wereup 0.8% which includes an uplift in Vintage Inns sales as a result of the newmenus and our margin reinvestment strategy. On the High Street same outletlike-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 17weeks reflecting a further increase in the number of consumers being attractedby the quality and value of our pub food offers. In drinks, our market sharegains have accelerated in the face of on-trade beer market volume declines ofapproximately 9% over the period*, with our same outlet like-for-like drinksales decline limited to 1.1%. The divergent trajectory of these productcategories is in line with our experience during the first winter of the smokingban in our Scottish pubs. In the 30 weeks since the introduction of the smoking ban in England, sameoutlet like-for-like sales for our English pubs not previously converted tonon-smoking have increased by 0.6%, with food sales up 4.9% and drink sales down1.0%. The trading in our Scottish estate continues to show good growth in thesecond year of the ban with same outlet like-for-like sales in the first 17weeks of this financial year up 4.4%. The Acquired Sites conversion programme has been rapidly executed and will becompleted by the half-year with 181 pubs now converted to our brands andformats. In the more difficult consumer environment, average weekly salesuplifts on these converted sites are running at approximately 17% above thelevels at which the pubs were acquired and we will continue to develop thetrading performance of these pubs to deliver our year three target of 30% salesuplifts in the 2009 financial year. We remain cautious on the outlook for consumer spending and in particular, thenear term prospects for the on-trade beer market. Against that background ourstrong food sales growth and substantial drinks market share gains reflect ourcompetitive focus on amenity, service and value. However, the smoking ban hasaccelerated the shift in the sales mix to food which is having an adverse impacton gross margins. In addition, rising food inflation continues to put upwardpressure on costs. To offset the impact of these pressures, strong managementaction 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 challengingto maintain fully net Retail margins for the year, particularly in the firsthalf. The evidence from Scotland was that the first winter of the smoking ban in ourbusiness saw the bulk of the loss in beer and machines sales, followed bysustained 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 aregenerating substantial market out-performance and we expect continuing strongmarket share gains with improved prospects after the 1 July anniversary of thesmoking ban. As a result of the actions being taken to drive sales and reduce costs, weexpect a resilient Retail operating performance for the year as a whole againsttrading conditions which are set to remain highly challenging. Whilst the cashloss from the hedges, which the Board very much regrets, will impact earnings inthe current year, the competitive operational out-performance of the businesscontinues to strengthen. This announcement is Mitchells & Butlers' Interim Management Statement for the17 week trading period to 26 January 2008. We will announce Interim Results forthe 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; pleasedial +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-like26 January 2008 sales growth sales growthResidential 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: Investor Relations:Erik Castenskiold 0121 498 6513 Media:Kathryn Holland 0121 498 4526James 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 measure. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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