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M&B and Whitbread linked to deals

07 February 2006

Mitchells & Butlers, the listed pub group, is rumoured to be taking a close look at Whitbread's pub restaurant business.

The 600-plus outlets within Whitbread are mostly branded either Beefeater or Brewers Fayre, the UK's number one pub restaurant brand.

Whitbread had a difficult 2005 with almost constant speculation towards the end of the year that it may be subject to a bid from a private equity house.

The company seems intent on being a moving target, however, and is itself eyeing potential takeover opportunities.

It is thought to have sounded out the competition authorities on whether it can bid for Travelodge, the number two budget hotel brand in Britain and add it to its Premier Travel Inn estate, already the biggest budget hotel chain.

If it receives the green light for such a move, then selling off its pub restaurants to focus on budget hotels makes sense. The one challenge is ensuring that its hotels have access to a restaurant.

At present, 40% of its pub restaurants sit next to a Premier Travel Inn and were it to sell them off then there needs to be a watertight agreement to give hotel guests access to breakfast at these restaurants.

Bass, the company from which Mitchells & Butlers sprang, ran into trouble when it sold-off some restaurants next to its Holiday Inn Express hotels in the UK. Whitbread will want to ensure it is not forced to ship-in continental breakfasts to guests were its relationship with any new operator of its former restaurants to break down.

Apart from this problem, however, a deal that sees Whitbread sell its pub restaurants and buy Travelodge looks attractive.

Unlike any private equity purchaser, M&B would be able to exploit back of house synergies with the Whitbread estate and Whitbread could do likewise with the Travelodge portfolio.

For its part, M&B last week made clear it would be prepared to increase borrowing to make future purchases, although it declined to comment on whether it was keen on Whitbread or other assets.

M&B has the capacity to raise up to £1b, a number that neatly is what Whitbread's pub restaurant business is expected to fetch.

And conveniently for Whitbread, Travelodge is expected to fetch only a little more than £1b as well, meaning back-to-back deals could be readily financed.

City analysts at ABN Amro said that the share price of M&B has some element of premium in the expectation that it would make a purchase in the near future.

By Andrew Sangster

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