Stories
Covid-19 torments two types of company: the ones that deal with crowds of people, and the ones with a lot of debt. Mitchell’s & Butler’s, the British pub chain 23.5 per cent owned by JP McManus and John Magnier, is both.
Mitchell’s & Butler’s is the second-biggest listed UK pub and restaurant chain. It runs 1,748 pubs across the UK. If you’ve ever been on a night out in a British town, chances are you’ll have passed one of its brands — an O’Neill’s, All Bar One, Toby Carvery or Harvester.
As recently as March, Mitchell’s & Butler’s was in good nick. With the fast-casual dining industry collapsing around it, Mitchell’s & Butler’s managed to increase sales 3.9 per cent to £2.2 billion and grow profit before tax by 36 per cent to £177 million.
Covid-19 has changed all that. In an update in late March, Mitchell’s & Butler’s said trading had been “severely impacted”, expected a “significant reduction” in outturn, and given the fluid situation said it could “no longer provide detailed guidance” on its performance for the year.
A lot will depend on the stance taken by Mitchell’s & Butler’s’s creditors. The company owes £1.7 billion, whose covenants are tied to its cash flow and earnings. Yesterday, Mitchell’s & Butler’s reported that the shutdown may have caused a “technical breach” of its covenants, but that its lenders have given it a temporary waiver until 15 May.
Mitchell’s & Butler’s share price is down 51 per cent against a 26 per cent drop for the FTSE 250, an index of UK companies. It’s been hit harder even than the other listed pub groups.
The pub companies whose share price has taken the biggest beating are, by and large, the ones with the biggest interest bills.
Marston’s had the biggest debt as measured by interest payments over operating profits. Its share price has fallen most. Mitchell’s & Butler’s had the second biggest debt, and its share price has fallen second-most. Fullers’ share price has fallen the least of any company in the sector, and it’s the least indebted.
If Mitchell’s & Butler’s operating profits dry up entirely, where does that leave it with creditors?
Interest payments last year came to £120 million. But Mitchell’s & Butler’s has cash. It has £133 million in cash and access to a £295 million credit line. So in terms of short-term liquidity, Mitchell’s & Butler’s is in a better position than most companies.
The debt covenants, though, could be tricky. Mitchell’s & Butler’s has to deliver 1.1 times its interest costs in free cash flow and 1.7 times its interest costs in Ebitda. That’s £132 million annually in free cash flow and £204 million Ebitda. In its mid-March update the company was confident it would clear the covenant hurdle for the first half of the financial year. Whether it’ll be able to come up with the cash in the second half is up in the air.
The trouble is that most of the debt is secured against Mitchell’s & Butler’s pubs. Mitchell’s & Butler’s owns £4.5 billion worth of pubs around the UK. Its secured lenders could potentially grab up to £1.7 billion worth of them if Mitchell’s & Butler’s fails to meet its covenants in the second half of the year.
To a great extent this is out of Mitchell’s & Butler’s hands. Until the lockdown ends, all it can do is cut costs to the bone. 99 per cent of staff have been put on Furlough; basic pay for all employees has been cut 60 to 80 per cent; discretionary Capex has been cut. It helps that Mitchell’s & Butler’s owns its own pubs – Mitchell’s and Butler’s owns over 80 per cent of the freeholds to its pubs and restaurants. So no rent to pay.
Mitchell’s & Butler’s debt load is an artefact of a pub group acquisitions boom in the 2000s. The pub sector as a whole came out of the period highly indebted. And the sector had been in the middle of another wave of buying, selling and borrowing before Covid-19 struck. EI, the biggest UK pub group, was acquired by the private-equity backed Stonegate as recently as March for £1.5 billion. Hong Kong billionaire Victor Li bought Greene King for £2.7 billion last August. And Asahi bought Fuller’s drinks business from it in January 2019 for £250 million.
While the rest of the industry was borrowing, buying and selling, Mitchell’s and Butler’s cut back on debt. Net debt is down from 4.7 to 3.7 times Ebitda since 2016. Debt due within one year is down from £233 million in 2018 to £95 million in 2019. If it comes through this with its pub assets intact, it will be a source of some satisfaction.
