Head of Mitchells & Butlers quits after £500m hedge loss

Simon English
21 May 2009

TIM Clarke has quit as chief executive of pub chain Mitchells & Butlers after losses on a disastrous hedging strategy spiralled towards £500 million.

The group behind O'Neill's and the Sizzling Pub Company disclosed last year that it had written off £400 million for the hedge, which was inspired by property tycoon Robert Tchenguiz.

He had persuaded the board to spin off the pubs in a sale and leaseback intended to release cash for shareholders. In return for bankrolling this deal, M&B's banks Citigroup, Royal Bank of Scotland and Barclays, demanded that a hedge was put in place against interest rates rising.

The deal collapsed but the hedge was left open, quickly racking up losses as rates tumbled. Today it emerged that a further £96 million has been paid finally to close this deal.

Clarke, who had offered to resign once before, now follows finance director Karim Naffah out of the door.

He will get a year's pay of £572,000, a pension pot worth many millions and other compensation yet to be agreed. His departure and M&B's financial position will raise further speculation that the group may merge with Punch Taverns. Talks between the two collapsed last year.

Chairman Drummond Hall today played down a press report which claimed M&B is actively looking at a rights issue. He said there are "no immediate plans" to raise cash from shareholders but said it would be considered if a "major acquisition opportunity" arose. He also described rumours that M&B would like to buy Punch's managed pubs arm Spirit as "the world's worst kept secret".

The chairman said that Clarke's resignation was accepted "with regret" and chief operating officer Adam Fowle will take charge on an interim basis.

The hedge write-off and Clarke's departure overshadowed decent half-year results.

Revenue in the last six months are up 3% to £1.02 billion, leaving a profit of £44 million, which is down 48% but better than rivals such as Punch and Enterprise Inns.

M&B has been taking market share from rivals and has won praise from analysts for being well run.

Mark Brumby of Blue Oar Securities said: "We have a picture of a company trading well in a weak market. The swap debacle is arguably an ongoing housekeeping issue and speaks more to the past than the future but shareholders will be understandably upset."

Roger Carr recently stepped down as chairman, so M&B has lost its top three executives in short order.

Like the other big pub groups M&B is burdened by debt. It has managed to cut them by £100 million but still has £2.6 billion clogging up the balance sheet. The shares, which were above 850p two years ago, today fell 12p to 249½p.

Paul Hickman at KBC Peel Hunt said: "The resignation of Tim Clarke is a setback. This may delay the restoration of the dividend, and reduces our target price to 280p, and our recommendation from Buy to Hold."