The R20 consortium looking to purchase Mitchells & Butlers PLC withdrew its bid for the U.K. pub operator ahead of the May 8 deadline imposed by the Takeover Panel, the regulatory body that administers the city code on takeovers and mergers (ASR 04/17/06).

Although the R20 still reserves the right to return with a bid within six months if another bidder emerges or if the board of Mitchell & Butlers decides to recommend an R20 offer, market sources say it is unlikely.

"Spreads should widen from current levels as the possibility of a buyback has disappeared, although they are likely to stay inside other pub paper as most investors consider Mitchells & Butlers a premium name, and a shortage of such paper exists," analysts at the Royal Bank of Scotland reported. "We think now is a good time to unwind overweight positions in favor of other high quality pub names and remain neutral."

Mitchells & Butlers must now concentrate on delivering shareholder value through returning cash, and possibly by making acquisitions, said the RBS analysts. Mitchell & Butlers has already announced its intention to use debt financing to pay back at least GBP500 million ($930 million) to its shareholders

Shareholder value

In order to deliver shareholder value via a cash return, analysts say Mitchells & Butlers would have to undergo an aggressive tap issue on its existing whole business securitization, which would require confirmation from the rating agencies to avoid a negative ratings migration. The company said last week that the securitized estate valuation would be updated as part of the refinancing.

The refinancing announcement was made at the same time as the pub operator released its half-year trading update at the end of April. Mitchells & Butlers showed solid operating performance. Combined with tight cost control, profit before tax is up 9.6% for the first six months of this financial year versus last year's.

Any acquisitions would likely benefit noteholders because synergies are likely to result.

The company has already announced that it is considering opportunities to acquire selected pubs from Whitbread PLC, another U.K. pub operator, which would also serve in diluting the scale of the planned share buy-back, explained Ganesh Rajendra at Deutsche Bank.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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