M&B: one too many
It’s always the quiet ones.
, the leading pub chain, has become the first non-financial company in the UK to be seriously crunched by the poor conditions in credit markets.
M&B has suffered a £274m loss from closing out a series of financial positions it took on.
These were supposed to be a hedge for a property joint venture that it planned to execute last summer, but which was cancelled when the onset of the credit crunch made it impossible to raise debt for the deal.
Unfortunately for M&B and its shareholders, the hedge was already in place – but it was an orphan and it was naked, unable to do what it was supposed to do, which was to provide inflation-protection to that elusive property spin-off.
In fact the total loss for M&B is a bit more than £274m. There is further £22m unrealised loss showing on a bit of the hedge which M&B will retain.
Also, closing out the hedge has pushed up M&B’s debts, so the business’s interest-rate bill will rise and reduce post-tax earnings by £13m this year.
So the total cost is well over £300m.
M&B needs all this like a hole in the head right now.
Trading conditions for pubs, after the smoking ban and at the onset of a consumer slowdown, are as bad as anyone can remember.
As it happens, M&B is doing better than its peers and is capturing market share – but it is struggling to increase sales by more than a fraction.
Understandably, both of M&B's senior directors tendered their resignations.
The board allowed the finance director, , to go. But it decided that the services of the chief executive, , were too valuable – and, presumably with shareholders’ consent, he is staying.
None of the executives will receive a bonus for 2007 – which is perhaps a poke in the eye to all those investment bankers who felt it appropriate to pocket bonuses in spite of the enormous losses their outfits incurred on sub-prime and related rubbish.
Two questions.
What responsibility for this debacle rests with the big banks, Citigroup and Royal Bank of Scotland, which left M&B with its naked hedge when they declined to provide loans for the property deal, having indicated that they would provide the finance?
And what of . M&B’s partner in the property joint venture that never was? Has he too incurred a big loss on a similar hedge he took out? And how does he feel about the fall in value of his M&B stake?
He runs his business a long way from the stock market, so does not have to share his financial pain with the wider world. But he can’t be feeling too chipper.
That said, Robbie Tchenguiz certainly has gumption. He's been increasing his holding in M&B, so that it's now 21 per cent.
The stock market believes M&B has hung out the for-sale sign this morning, by making the resonant statement that it is reviewing "strategic options for value creation". Which is why its share price has risen a bit, in spite of the humiliating loss.
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Serves them right as with those companies and financial institutions that have caused the present crisis.
Prudent management and a clear head have obviously been substituted with micky mouse practices.
A question, how vulnerable are the hedge funds and venture capital companies faring at the moment?
I would love you to get a job in the 'real' world 'Robbie', where not all is cast in pure clarity with the benefit of hindsight.
You so careless comment that investment bankers raised sub-prime and associated rubbish, but I again fail to see where you criticised these products when they were working, i.e. last year.
If only we all could have a job that allowed us to poke fun at the mistakes of the past and rest happily on our soapbox knowing that we don't need to do anything constructive, instead just be a Monday's expert.
Actually, this should be the new name of your collumn. Monday's Expert, by Robbie Peston.
Hedge funds and VC houses unlikely to be terribly fussed about 18% CGT on their carried interests at the minute, I suspect.
Aston salesmen will be cancelling their yacht orders.
Oh. Yeah. There is no conceivable set of circumstances in which he acted alone, however shambolic their credit/risk practices.
All these company directors think they are property tycoons and that actually running a profitable business is beneath them.
How many of them actually see the inside of one of their pubs or kitchens?
As usual the consumer and employee will get screwed when "efficiency drives" will increase prices and lower wages to protect shareholder value.
perhaps they should be made to study elementary book keeping, or do they think they are too clever ? trying to outsmart everyone else they were riding for a fall,is our economy rudderles,dismasted,holed and who is at the helm ?the lights are on but it seems no one is home
Consequences
1) Job losses at M&B to cover the losses
2) Future prospect for industry poorer due to reduced scale of operations
3) Directors and management have taken big bonuses based on valuation profits in previous years. The profits that were never meant to be.
4) Director still in his job.(Somehow)
5) Banks still make their commission
You can repeat this for thousands of other companies that will follow and ones that have already seen this.
I agree with Ken Roebuck. It seems to me the finance director, particularly, got bored with running a dull old pubco and was easily seduced into a glamorous (for finance directors) world of venture capital and hedged property deals to make him feel like a real City trader.
Just as well the boring core pub business is robust or the whole company would now be going down the pan. This is what has saved Tim Clarke.
Concentrating on your core strategies (like pubcos running pubs) may be dull and unspectacular but it would seem to be the sensible option.
No sympathy for them. Playing around with the property market in order to get rich quick, and it obviously had no safety net. You should only gamble with money you are prepared to lose.
However, the banks should share some of the blame, but not all. Old story: until you have soemthing in writing, it is not confirmed.
This story is more as Ken says about prudent management. If you were buying a house, you would have your mortgage in place, exchange contracts and have a completion date before you bought your house insurance. Otherwise you're gambling. Same principle here.
M&B's excuse is that they just took their banks advice and were an unfortunate victim of circumstances. Maybe, but one might expect a highly paid FD to ask a few smarter questions and get a few guarantees in place before gambling the company silver?
Perhaps they should've just stuck to running pubs. Given Robert's typically apocalyptic statement that 'Trading conditions for pubs, after the smoking ban and at the onset of a consumer slowdown, are as bad as anyone can remember.' - a modest growth in M&B's sales would appear to indicate they have a talent for it.!
If banks are not lending money to banks they are hardly likely to lend it to a business that is in recession itself since the smoking ban.
I'm sure there will be many more cases of business failure in this sector before too long.
This story is more as Ken (#1)says about prudent management. If you were buying a house, you would have your mortgage in place, exchange contracts and have a completion date before you bought your house insurance. Otherwise you're gambling. Same principle
here.
M&B's excuse is that they just took their banks advice and were an unfortunate victim of circumstances.
Maybe, but one might expect a highly paid FD to ask a few smarter questions and get a few guarantees in place before gambling the company silver?
Perhaps they should've just stuck to running pubs. There's a lot to said for sticking to your knitting. Given Robert's typically apocalyptic statement that 'Trading conditions for pubs, after the smoking ban and at the onset of a consumer slowdown, are as bad as anyone can remember.' (give over) - a modest growth in M&B's sales would appear to indicate they have a talent for it.!
Bottom Line: M&B should not have entered into a transaction to hedge the property joint venture until that joint venture was set in stone. If the banks had not committed to funding the deal (merely indicating a willingness) they were under no obligation to proceed with it - M&B should have taken out another hedge to protect their exposure to the banks withdrawing their funding offer! Their Finance Director was right to resign.
> Prudent management and a clear head
> have obviously been substituted with
> micky mouse practices.
Spot on. These "hedges" appear to have
the same problem as those old fashioned
"endowment mortgages". It's the
commission that they are interested in,
not the effect on the customer. They
don't give a hoot about him.
Many Financial companies have a December year end so the shareholders haven't seen the year's results nor if there may be a difference of opinion between the auditors and the Board- maybe unlikely.
But if results show large writedowns that will bve the time to ask if the Board directors should be paid bonuses by the company or share owners.
When looking to cover a potential deal like this what Management should have done is take out a deal contingent hedge, i.e. they have then protected their position but if the deal does not complete then the hedge does not come into existence and there is no loss, fairly standard market practice that should clearly have been followed here.
The old adage 'You can't see the wood for the trees' seems somehow apt . Only it needs reworking - ' You can't see reality for the hedges' . Unless it is your core business then financial gyrations by non specialists have a nasty habit of going belly up . Sadly the only ones affected seem to be the staff - laid off to protect the inept.
Another example of how in the financial world one man's loss is another man's profit (cf situation at Soc Gen where its counterparties are €4.9bn richer!)
So this is M&B's loss - do we know who they bought the hedge from?
Robert - I would say the first casualty was property price fall though that was/is more passive than the one you mentioned here.
changing the subject a little bit the french bank who lost all the money who won! all of it, I cant find out who they are peter cripps
Jonathan (#17) is spot on. Who is making the massive profits out of the current massive losses? The money doesn't get shredded or beamed up Scottie style. So why not a headline "x makes 3 billion" as well as or rather than "y loses 3 billion."
This story has rather a fin de siecle air to it. As will, no doubt, many similar stories to follow in 2008.
What I would like to know is the book value of all these huge empty properties in our city centres.Prime locations but empty for two, three, four or more years. How this is accounted for in balance sheets and whether the sites are boasting a higher paper value today after being empty for three years than when first vacated by the last paying tenant.
Bottom Line: M&B should not have entered into a transaction to hedge the property joint venture until that joint venture was set in stone. If the banks had not committed to funding the deal (merely indicating a willingness) they were under no obligation to proceed with it - M&B should have taken out another hedge to protect their exposure to the banks withdrawing their funding offer! Their Finance Director was right to resign.
What they obviously should have done is to take out a hedge hedge. That woul have protected them against their first hedge going belly up. More importantly, it would have given their bank even more nice fat commission.
Then they should have taken a hedge hedge hedge...
Don't blame the banks on this one, Robert. To take out a hedge of this size and then be left 'legged in' is ridiculous. It sounds to me as if the directors were well out of their depth. A hedge, if properly executed, should lock in a profit not leave you open to an unquantifiable risk! Blimey!
In running with the hedges after the original property deal fell through, M&B were using derivatives speculatively, which (according to their Annual Report) is contrary to their own risk policy.
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As was said earlier, stick to running the pubs!
This smoking ban may prove to be not so wondrous as everyone imagined.
We are seeing pub revenues plummet, along with tax revenues as beleaguered smokers are bowing to peer pressure and giving up.
The increase in life expectancy will take a heavy toll on the NHS when all these smokers live to a ripe old age.
Personally I quit at the beginning of the year. It's miserable but at least I have the comfort of knowing that I am not supporting Brown and Darling's mad expenditure quite so much as before.
Spot on no. 12,
You can't hedge unless there's something to hedge against.
Whoever authorised this 'zero-hedge transaction' may struggle to negotiate minimum-wage for their next job.
Unless, of course, perhaps some kind of skullduggery has taken place.
#19 & #20
Just because someone loses 3 billion doesn't mean that anyone makes 3 billion. It only means that the value of what you had was less at a particular price than you had previously acquired it - although I suppose if you followed the transaction to its root then someone will have originally made a profit.
However, as the stockmarket has been following its 6 month pattern of surging after drops then the people that bought the capitulated SocGen 'positions' probably did do well.
This pattern of share price resurgence after a steep decline is interesting however. There has been a noticeable pattern over the past 6 months of people buying in after a drop. It suggests that people either believe that this is still a long term bull market and that the banks just have to 'reveal their loses so they can be worked through the system and we can get back to a healthy economy' (they can't know their losses yet; they're still accruing and the chances of a healthy economy in the near future is nigh impossible), OR that people are trying to take their opportunities while on a precipice. I would predict that if there are two or three days of steep falls in a row - which hasn't happened yet - the fragile confidence might burst and it will be worrying.
There is a morale to this tale and that is people and businessmen should only stick to what they know and understand. They should not be seduced by the slick talking and unscrupulous spivs working in the finance industry.
These slick talking salesmen (they are not financial experts) are only concerned about making a quick killing. They are not worried about the short term, never mind the long term viability of the companies or the people who work in these companies.
Firstly, M&B is a company with a knowledgable treasury department. I find it quite amusing that they would have secured a hedging instrument without cast iron guarantees that they would be required. The blame for this one falls squarely with the FD of M&B, which is why he resigned.
Secondly, Tchenguiz has bought speciulative stakes in several companies with a view to helping them liberate their property portfolios (basically accusing them of being property companies with small trading activities). My heart bleeds for his losses, whatever they are.
And one more thing. The c.£300m you quote above is post tax. In other words, we the tax payer, have paid approximately £100m for this bog-up.
Big pub groups should be concentrating on running good pubs, stop trying to hedge and raise the standard of food, drink and service in British pubs, then profits will came from sound business rather than cheap gimicks.
PANIC PANIC PANIC!!!!
As I write the Fed has just dropped rates another .5%
They are sooooooooooooo worRied by what they can see.
The thing is, that if the Fed keep cutting like this they will be at 0% by Christmas.
And where does this leave the BoE. Merve would rather fight inflation. Because of the Fed he is gonna have to fight a rapidly degrading UK trading postion.
PANIC PANIC PANIC!!!
Does anyone realise the rackets that goes on with these companies. They start out as a family concern,and finish up as being owned by some Private Equity Company in Outer Mongolia. To talk about individual shareholders is farcical,the few that are left are out voted 10 to1 by the PEC's. Globalisation has taken over. We get the same in Australia a weekly magazine suddenly folds, and lo and behold it is owned by Private Equity Company PAC based in Luxemburg,and we all thougt one of our millionairs owned it. The name of the mag "THE Bulletin".
M&B appears to be the victim of somwhat unreasonable behaviour by RBS and CitiCorp. If they insisted that inflation and interest rate protection was required-not unresonably-several types of conditional protection were available, not least options into taking up a swap, a swaption. This would have cost an up front premium, which I surmise M&B might have been reluctant to pay. Swaps are OTC, tailored to the circumstances of each individual borrower, thus one has to ask why this type of instrument was not used, rather than entering into the transactions before receiving a credit committee approved final offer. Shareholders should be asking some searching questions AND the banks concerned do not come out of this in very favourable light. In my experience RBS is treating its SME curtomers for interest rate swaps in a very similar manner, trying to claw back losses by squeezing its customers.
Makes a change for the shareholders to be suffering rather than their landlords, who have had a lousy deal for years. Breweries are notoriously greedy and it's great to see them get their fingers burnt.
I happen to work for M&B while at Uni and have noticed it change a lot, this comment is more about the company than profits but some little things that M&B have shown that they are going wrong like the staff discount card was withdrawn early 2007 with the excuse that the meals offered are already value for money, yet most staff that work for M&B are just over minimal wage but still very low. not only that the chain own by M&B, vintage inns has had a huge loss, and yet huge investment into the brand. a lot of failing vintage inns are planned to become part of the company’s successful pub and carvery brand, a much more low status brand but doing a lot better than many of the brands M&B own. I think the lack of good management in the company has caused all this bad outlook on the future of M&B, it looked all spend spend spend with doing pubs up but when my district manager pulls up at the pub i work at for the first time ever in a chauffeur driven car it tends to click in your mind, why do I getting less, management getting a lot even on failing brands and the company doing so badly?
So the Office for National Statistics has told the Treasury it is to include all or a big chunk of the Rock’s borrowings on the public sector balance sheet.
I must admit I can't blame the ONS. I would feel the same if my salary were linked to the CPI.