MITCHELLS & BUTLERS PLC
16th June 2014
MITCHELLS & BUTLERS PLC ACQUIRES THE MAJORITY OF THE ORCHID GROUP ESTATE FOR £266 MILLION
Mitchells & Butlers plc ("Mitchells & Butlers"), the UK's largest operator of managed pubs and restaurants, announces today that it has acquired the majority of the activities of the Orchid Group ("Orchid"), including 173 predominantly freehold pubs and the Orchid head office. The purchase price, paid entirely in cash, is £266 million.
· High quality, well-located estate of 173 pubs, of which 158 are freehold or long leasehold.
· Expands Mitchells & Butlers' share of the growing UK branded pubs and restaurants market in line with its stated strategy.
· Opportunity for substantial sales and profit uplifts from conversion of 96 pubs to Mitchells & Butlers brands and formats over a two year period.
· Cost savings and synergies of at least £6 million per annum available from rationalisation of support functions and combination of purchasing.
· Immediately enhancing to adjusted earnings1 with further improvements to earnings and returns as cost savings and synergies are realised and as conversions are undertaken. Overall, expected double digit earnings enhancement1 with returns well ahead of cost of capital.
Commenting on the transaction Alistair Darby, Chief Executive of Mitchells & Butlers, said:
"The acquisition of the majority of the Orchid estate will accelerate Mitchells & Butlers' growth and present significant opportunities for value creation through cost savings, synergies and the conversion of Orchid pubs to Mitchells & Butlers brands. We greatly look forward to welcoming the Orchid employees who will transfer to Mitchells & Butlers as a consequence of this acquisition."
Details of the transaction
Mitchells & Butlers has acquired the majority of the Orchid estate following a sale process conducted by the owners of Orchid. The acquired assets comprise 173 pubs, the Orchid head office function and associated brands, contracts and licenses (the "Acquired Assets"). The transaction is structured as a purchase of assets and certain trading companies. Definitive documentation has been executed with the vendor, Orchid Structureco 1 Limited, at which time the transaction simultaneously completed.
The consideration for the acquisition is £266 million which has been settled in cash and which is subject to an adjustment of up to £2 million depending on the level of working capital and cash in the business at completion. Mitchells & Butlers has funded the substantial majority of the consideration using existing cash resources in addition to putting in place unsecured facilities totalling £150 million, provided by existing lenders. The new facilities have a maturity of three and a half years.
The owners of Orchid have retained a number of leasehold sites. As Mitchells & Butlers has acquired the Orchid head office function, it has agreed to provide services to these sites for a period of up to fifteen months, the terms of which have been agreed under a transitional services agreement ("TSA").
Principal benefits of the transaction
· Expands Mitchells & Butlers' share of the UK branded pubs and restaurants market which is expected to grow by 6% per annum between 2014 and 2018. This is in line with Mitchells & Butlers' stated strategy to focus on long-term growth in the eating-out market.
· Opportunity for significant increases in sales and margin. The strength of Mitchells & Butlers' brands and formats, together with operational expertise in brand development and evolution has driven average weekly sales of £22.7k from Mitchells & Butlers' pub restaurants, compared to £15.3k per week generated by the Acquired Assets. Due diligence, site appraisals and detailed plans have already been formulated to convert 96 Orchid sites to Mitchells & Butlers brands and formats such as Harvester, Toby Carvery, Ember, Miller & Carter, Castle and Vintage Inns over the next two years. Capital investment in conversions of the Orchid sites of approximately £35 million is estimated over the two years, generating strong incremental returns. This conversion programme will complement Mitchells & Butlers' existing expansion plan over the same time period.
· Mitchells & Butlers intends to add 77 of the pubs in the Acquired Assets to its Heartland portfolio. Many of these sites have recently received investment and will be able to continue trading at their current strong sales and profit levels, further benefiting from purchasing synergies as a part of the enlarged Mitchells & Butlers group. A small number may be considered for disposal.
· Significant cost synergies are achievable from the transaction. Orchid's support functions will be combined with Mitchells & Butlers' when the TSA is concluded which, in addition to purchasing scale benefits is anticipated to result in savings of at least £6 million per annum. Within its current year results Mitchells & Butlers intends to report an exceptional item of approximately £10 million representing cash costs associated with the transaction of approximately £4 million and costs to be incurred through restructuring and integration of the two businesses of approximately £6 million.
Information on the Acquired Assets
The Acquired Assets include 173 managed pubs from the Orchid Group. These are spread across the UK with a bias towards the South East and North West of England. There are 151 freehold, 7 long leasehold and 15 short leasehold sites.
The gross assets of the Acquired Assets were £188.9 million as at 31 December 2013. On a run-rate basis2 the Acquired Assets generated sales of £138.0 million and made a profit contribution before allocation of head office costs, depreciation, amortisation, interest and tax of £29.2 million. The head office costs for the year to 31 December 2013 were £8.3 million on a run-rate basis2.
1: This should not be construed as a profit forecast. In particular, it should not be taken to mean that the earnings per share of Mitchells & Butlers for the year ending 30 September 2014 will necessarily be higher than for the year ended 30 September 2013.
2: Run-rate financials adjust for the effects of sites that have been closed during one-off renovation periods during the year. They also include the annualised profit uplift from these renovations and head office cost savings.
UBS acted as sole financial adviser to Mitchells & Butlers on the transaction.
Tim Jones - Finance Director
+44 (0)121 498 6112
James Murgatroyd (RLM Finsbury)
+44 (0)20 7251 3801
Notes for editors:
· Mitchells & Butlers is the UK's largest operator of managed restaurants and pubs, with an estate comprising 1,592 managed businesses and 59 franchised businesses as at 12 April 2014. Its portfolio of brands and formats includes Harvester, Toby Carvery, Country Pubs, Sizzling Pubs, Crown Carveries, Oak Tree Pubs, All Bar One, Browns, Miller & Carter, Castle, Alex, Nicholson's, O'Neill's and Ember Inns. Further details are available at www.mbplc.com.
· Mitchells & Butlers currently serves around 130 million meals and 410 million drinks each year and is one of the largest operators within the UK's £75 billion eating and drinking out market.