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Isle of Man Examiner, March 2006 Businessupdate 17
PORTFOLIO
PETER SHARKEY
Peter.Sharkey@btinternet.com
EQUITIES
M&B’s one of those gems
During idle
moments — and
I can assure you,
there have not been too many of
those recently — I make a point of
examining what I call peripheral
businesses, ones that do not
necessarily fit my ideal criteria for
stock selection, but which remain
worthy of perusal because, well,
you just never know…
Over the past few years, I’ve
looked at all sorts of angles and
different sectors, with varying
degrees of success, and about 18
months ago, I decided to start
compiling a database of
companies that had what I
considered to be an undervalued
asset base. Granted, that’s a
subjective notion, but having
decided to ignore intangibles, I
concentrated instead upon
examining the value of each
organisation’s realisable assets.
What makes this exercise
rewarding is the occasional
discovery of an absolute gem.
I define a gem as a profitable,
non-property sector company
which nonetheless owns huge
chunks of real estate and where
the people running the business
are concentrating upon doing
precisely that, rather than trying
to turn it into a completely
different beast. Of course, the
assets can sometimes be used as
security for borrowings, although
the level of debt must never
exceed the value of the company’s
tangible assets.
According to my criteria, a gem
becomes even more attractive
when its UK property portfolio
has not been valued for years —
the longer, the better.
Late last year, which feels like
the last time I enjoyed an idle
moment, I identified the pub
chain Mitchell and Butler as one
of my ‘peripheral’ businesses.
There was nothing particularly
scientific about this selection,
merely that I had reached the
letter ‘m’ in my alphabetic trawl
through organisations which I felt
might be of interest. During the
course of my analysis, however,
M&B began to sparkle.
Turnover had risen steadily
between 2003 and 2005, from
£1.5bn to £1.67bn, while
operating profits had increased at
a slightly slower rate, but were still
a shade under £300m. What really
started making M&B appear
seductive, however, was its
freehold property portfolio.
More than 85 per cent of the pub
chain’s 2,000-odd estate was
freehold properties, valued in the
books at £3.85bn; they were last
valued in 2003. I heard a little bell
ring when I read this, because at
the time, M&B had a market
capitalisation of £2.1bn and
around £1.6bn-worth of
borrowings. I deemed a modest
dabble was in order, buying M&B
at 410p, although I was a bit
miffed when they fell back
towards 390p in January, despite
some early rumblings of a
potential takeover. Perhaps
another modest dabble then…
Step forward Robert Tchenguiz,
who, it is reported, has
approached Goldman Sachs with
a proposal to launch a joint bid
for M&B. He has yet to make a
formal offer for the chain,
although his interest caused the
share price to surge towards 490p,
enough to ensure I raised a glass
to him last week.
Tchenguiz already owns some
1,200 pubs and bid for Spirit’s
1,800-strong chain last year,
although he lost out to Punch
Taverns. He would appear to have
everything in place to launch a
genuine bid for M&B, after which
several analysts believe he could
leverage the freehold estate to
release as much as £500m,
especially as M&B’s ratio of debt
to earnings is considerably lower
than the sector average.
I suspect that although
Tchenguiz probably doesn’t keep
a list of ‘peripheral businesses’, he
knows a gem when he sees one
and there is little doubt that in his
eyes, Mitchell and Butler falls
firmly into that category.
Like most people, I
remained blissfully
unaware of the fact that
2006 is the European Year of Worker
Mobility, although when I discovered
this potentially life-changing
information, my immediate thought
was, ‘Who decides upon such labels
and what is the EU planning to
celebrate its Maoist-sounding
project’
A visit to the appropriate EU
website informed me that ‘As the EU
strives for more “Growth and Jobs”
(sic) helping workers to move to new
countries/sectors has become even
more important.’
What’s this The EU not only
embracing, but actively encouraging,
one of the most significant aspects of
Britain’s competitive advantage
Apparently so. Moreover, it plans
spending 10 million euros to raise
‘mobility awareness’ and will screen
‘mobility evenings’ on ‘a European
TV channel’. Sounds like riveting
stuff.
I mention this not to poke fun at
the EU, but because early next
month just six weeks after the
EYOWM was launched, the UK
Government plans to impose severe
restrictions on labour mobility, with
potentially damaging consequences
for the British economy.
On April 6, the UK Government
will introduce its mandatory
‘Property Licence’ for properties it
deems are ‘houses in multiple
occupation’ (HMO), namely houses
of three or more floors let to five or
more people. Under the provisions
PROPERTY
An assault on landlords
of the 2004 Housing Act, property
owners failing to register for a fiveyear
licence could be fined up to
£20,000.
However, in addition to being
fined, landlords who do not register
with the local authority in which the
property is located could discover
they have committed a criminal act
and may find themselves subject to a
rent repayment order, permitting
local authorities to seize up to 12
months rent.
The effects of this hateful landlord
levy will be severalfold.
First, it will push the cost of owning
investment property up by
thousands of pounds: one local
authority has already suggested its
licence fee will be ‘around £1,100’;
others may go higher. Second, it will
invariably push rentals up too,
especially for students, who tend to
be the people most likely to occupy
an HMO as tenants. Third, some
landlords will feel the additional tax
makes it uneconomic to remain in
the buy-to-let sector and will sell up
altogether, thus reducing the stock of
private rented accommodation.
According to the UK Government
department responsible for
introducing the law, it is designed to
‘eliminate poor housing for the
vulnerable’, although in truth, the
licence fee will merely fund another
layer of bureaucrats who, after April,
will be able to formally identify
rented property and retain the
owner’s details on file.
Of course, the next legislative step
will be explained as some form of
‘rationalisation’ or even promoted in
the name of ‘fairness’.
‘Why,’a housing minister will
almost certainly ask within the next
few years, ‘should one body of
private landlords have to pay a
licence fee and others not We
believe there should be a standard
fee, etc, etc…’ That’s right. The real
estate in which you have invested as
an adjunct to your pension will soon
be hit with yet another form of
taxation.
But if that were not enough, two
particular aspects of this odious
legislation annoy me more than
anything else.
First, UK structural unemployment
levels are lower than elsewhere in
the EU precisely because the UK
already enjoys a high degree of
labour mobility. It is well oiled by a
supply of private sector
accommodation, much of which
falls into the HMO category. If this
disappears, or its operational costs
rise, labour mobility will be
hampered.
Second, the teams of bureaucrats
funded by this invidious licence fee
will have to justify their existence;
they will do so by imposing extra
costs upon landlords — insisting
that extra fire doors be installed in
properties, or completely useless
additional kitchen facilities be
installed in lounge areas.
It is galling to note that local
authorities have been able to do this
at least for the past 20 years, but
most have been too inefficient to do
it properly. No new law was required;
the legislation already existed,
although when the latest one comes
into force, many landlords may
decide they’ve had enough of
assisting labour mobility and
consider investing elsewhere.
< I’m 32, two kids,
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were No 1. I’ll never get
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