Mitchells warns over property costs

All Bar One and Harvester owner Mitchells & Butlers today said costs linked to its shelved property deal had more than doubled amid the current credit crisis.

The group, which operates around 2,000 pubs including the O’Neills brand, said its liability from the planned joint venture with property entrepreneur Robert Tchenguiz had risen to £140m (€200m), up from £60m (€84m) at the end of July.

The company stressed that this would not hit profits during the current year, with full year results expected to be at the top end of hopes, despite the impact of the weather and smoking ban.

Mitchells & Butlers first unveiled plans for a property tie-up with Mr Tchenguiz’s R20 investment vehicle in May, which would have seen the group spin off around 1,300 pubs into the £4.5bn (€6.5bn) joint venture.

M&B was close to launching the deal in August but had to delay its plans after volatility hit debt markets following the collapse of the sub-prime mortgage market in the US.

By then the company had already entered into a financing agreement, or hedging arrangements, based on interest rates and inflation forecasts.

The group said today the growth in the deficit reflected the combined effect of “reduced long term interest rates and higher long term inflation expectations” following the tighter credit environment.

While the company said the extra cost would not hit results in the current year as banks had not called in the deal, analysts at Dresdner Kleinwort said this was only as a result of rolling the loss into a future refinancing or the property joint venture.

It is “effectively spreading the cash cost over future years,” they said.

“Either way around 6% of shareholder value has been lost. Further it is impossible to know the full extent of this loss until the debt markets stabilise.”