Canaccord raises Mitchells and Butlers to 'buy' following sector shake-up

Canaccord, which also increased its target price for Mitchels and Butlers from 300p to 400p, said the agreed bids for Ei Group and Greene King at 38.5% and 51% premiums to their last undisturbed share prices were "reminders of the latent value of the asset-intense pubcos in general" and M&B "in particular".

"The bids may have been the catalyst for our reappraisal but are not the sole reason," added Canaccord. "M&B is now making good progress versus its strategic plan, driven by its Ignite self-help programme."

The Canadian broker pointed out that M&B has "an unusual and concentrated shareholder register", where a potential bidder would only need to make a few calls to gauge the appetite for an offer - with billionaire Joe Lewis owning around 27%, Elpida owning 23% and Smoothfield holding roughly 4.4%.

While a bid for the group was far from guaranteed, Canaccord stated that in the advent of a bid, it would expect a higher multiple, more akin to Ei Group's and Greene King's trailing exit EBITDA multiples of 11.4x and 10.0x.

Canaccord said it viewed M&B as "a long-term game", noting that the group should de-lever over the next decade as it looks to pay off £1.5bn of its £2bn of debt and invests in its top-line more than its dividend.

"M&B is starting to make real progress in reducing its debt burden and over the next five years it is scheduled to pay off £478m of debt, equivalent to a transfer of 23p/share per annum from debt to equity assuming no change to EV."