Punch could split if M&B bid goes through

By Marc Jones

LONDON (Reuters) - Punch Taverns (PUB.L: Quote, Profile, Research) has bought its way to become Britain's biggest pub operator, but its next big deal, a possible bid for rival Mitchells & Butlers (MAB.L: Quote, Profile, Research), could be a prelude to breaking itself in two.

Buying Mitchells & Butlers (M&B), owner of the Harvester and O'Neills chains, would beef up Punch's managed pubs business, compared with its current heavy bias towards tenanted pubs.

This means that if talks with the government over possible property tax changes go the pub industry's way, Punch would be in a position to split into a tenanted-pub focused real estate business and a separate managed pub operator.

M&B is up for sale after a property deal went disastrously wrong, losing it 400 million pounds ($792 million), and costing the firm's chairman and finance director their jobs.

Rivals and private equity players would once have been falling over themselves to buy M&B's approximately 2,000 English pubs, but the credit crunch has paralyzed debt markets leaving few potential buyers.

Although media reports say private equity firms Blackstone (BX.N: Quote, Profile, Research), CVC and KKR have all made enquiries, only Punch has its cards on the table proposing a merger to and offering M&B shareholders a cash sweetener.

A source familiar with the matter told Reuters that, with other suitors showing little serious indications of making offers, M&B considers Punch the frontrunner.

So M&B must decide if tying up with Punch is the best option or whether gritting its teeth, restructuring and trading through its problems is a better route, at least until credit market conditions improve.