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After months of denial, Punch Taverns (PUB) has confirmed it wants to merge with rival pub operator Mitchells & Butlers (MAB). The proposal went public on Monday, less than a week after Mitchells’ finance director quit and shareholders demanded the removal of its chairman at a rowdy AGM.

Although the merger is still at the proposal stage, the terms would see equal ownership between both sets of shareholders. M&B’s investors would also share a £175 million cash payment, roughly 44p per share.

Punch Taverns wants its CEO Giles Thorley and CFO Phil Dutton to keep their roles in the enlarged business, with M&B’s CEO Tim Clarke to become non-exec chairman.

The merger proposal shouldn’t be a surprise as the England smoking ban and downturn in consumer spending have hit trading at both companies. There would be significant cost savings to be found by combining operations. It would become the UK’s largest pub company with around 10,500 pubs although it may sell underperforming sites.

Mark Brumby, analyst at stockbroker Blue Oar, says issues to address before a merger include the possibility of a counter bid, offering cash or shares in a business other than Punch. ‘A merger with Punch would not provide M&B’s shareholders with the two things they arguably most desire – an exit and a premium price. Indeed many shareholders would be looking at an overall loss on their investments.’

Private equity houses including Cinven and CVC are understood to be in the frame. Property investor Robert Tchenguiz owns 23% of M&B and may block a merger with Punch if he can find a partner to table a bid.

Stockbroker Landsbanki suggests M&B investors should sell their shares while there is price strength from bid interest. Analyst Kate Pettem believes there could be execution risks to a tie-up with Punch.

The shares of M&B rose 4% to 468.5p on Punch’s proposal on Monday. The shares are still some 50% down on mid-2007 highs, with weakness after a failed property venture. A hedge deal linked to the scheme resulted in £274 million post-tax losses and the launch last week of a strategic review.