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Mitchells & Butlers could follow the example of Tesco by creating a joint venture property company that crystalises property value but avoids a full conversion to a real estate investment trust, according to Deutsche Bank analyst Geof Collyer. A move by M&B to copy the Tesco model would release as much as £950m - 220p a share -to hand back to shareholders, he said. Tesco banked £570m of cash last week after injecting sites worth £366m at book value into a joint venture with British Land. Both parties put in £80m of equity each and the properties were revalued at £650m and leased back to Tesco at an initial yield of 4.46%. The deal was broadly profit-and-loss neutral with Tesco planning to return most of the £570m to shareholders. Tesco retained a call option that allows it to buy back the properties in ten years’ time. Collyer said that M&B could sell 20% of its estate, worth £625m at 1999 book value, into a joint venture like the Tesco one and raise £1.1bn less the equity - around £137m - it injected into the joint venture. He added: This would leave it with over £950m to hand back to shareholders. This is equivalent to about 30% of the group’s current market capitalisation. “This would leave M&B with scope for further asset revaluations - notably from the Whitbread pub conversions - and retain control over an estate that would be 70% freehold /30% leasehold with an option to buy back 20% in ten years’ time. Collyer noted the Tesco deal seems to be a way of crystalising current property values whilst retaining at least 50% ownership and control over the properties versus a maximum of 10% ownership under a Reit structure.

 

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