The Financial Times published an article earlier this month suggesting that U.K. pub operator Mitchells & Butlers Finance's whole business securitization could implicitly constitute a "poison pill" in the takeover bid led by the consortium R20. The reasoning is that a bid might prompt the redemption of the whole business notes at a premium.

Deutsche Bank equity research analysts released a report that suggested the R20 might have to employ an aggressively levered whole business financing structure to make the takeover attractive and workable. To take this route, the M&B securitization structure would have to first be unwound. This could incur significant costs if the notes are called on the yield make-whole particularly on the fixed rate notes. There are also associated swap breakage costs on the floating and dollar denominated notes, explained Ganesh Rajendra at Deutsche Bank in a report last week.

In his response to the FT article, M&B Chief Executive Tim Clarke said that the M&B transaction is financed through long-term debt on fixed interest rates - an early repayment of the debt via the yield make-whole option could incur a charge because long-term rates are currently lower. However, Clarke said suggesting this could work as a "poison pill" was incorrect because there would be no change of control provision in the securitization, which would not force the new owner to unwind M&B's debt.

"The costs involved in breaking the securitization structure may make it prohibitively expensive as an option to the bidder," wrote Rajendra. "We consider it far more likely that a buyer would lever the existing structure as much as possible via value taps and, to the extent that the buyer owns unencumbered pubs of sufficiently good quality, via asset taps."

Analysts at the Royal Bank of Scotland said that it was likely the R20 had already considered the implications for the existing M&B securitization. "Assuming that R20 proceeds with the opco/ propco route [which] we think it probably is, there are two alternatives: R20's bid succeeds and it leverages the acquisition, redeeming the existing deal, or M&B undertakes a more aggressive tap issue and adds another class under the [triple-B plus] Class C notes," reported RBS analysts.

According to RBS, if the R20 redeems M&B's existing deal, it could result in an upside for noteholders. However, if M&B undertakes a tap, it could lead to some spread widening on the notes. "We actually think a successful bid is unlikely, but we would still advocate holding on to paper to see what happens, and retain our overweight recommendation on M&B bonds," RBS analysts said.

The Takeover Panel, the regulatory body that administers the city code on takeovers and mergers, announced on April 7 that the R20 must announce a formal bid for M&B by noon on May 8, or express its intention not to bid.

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

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