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The decision by Punch Taverns (PUB) to scrap plans for a merger with All Bar One-operator Mitchells & Butlers (MAB) has prompted a flurry of market speculation over the latter’s future. A consensus of opinions suggests there is one leading strategy. Private equity would take hold of the business, strip out costs and drive an aggressive recovery programme. To augment faster growth, M&B would be used as a consolidation vehicle for the leisure industry.

Private equity groups Blackstone and CVC have reportedly changed tactics. Rather than make a full bid for M&B, they are seen to be interested in a minority stake at a small premium to last week’s price. Bowling operator, Georgica (GGA:AIM), has already been suggested as the first acquisition target. It would be a natural fit to M&B’s Hollywood Bowl chain. Georgica was up for sale last year but scrapped talks after failing to attract ‘an acceptable offer’. It has already offloaded the Riley snooker and pool business to reduce debt, but investors in Georgica have still been left reeling with a 68% drop in the share price in the past year.

‘The idea of then using M&B as a vehicle with which to consolidate elements of the pub industry is not surprising,’ says Blue Oar analyst Mark Brumby in a note to clients. ‘Fewer head offices should help to support profitability in the current challenging trading environment and private equity would understandably like a slice of that. Preferably without putting up too much of their own money.’

Investment bank Lehman Brothers believes M&B will need refinancing after closing a £400 million hedge facility. ‘This is an issue due to the group structure with the majority of cash flows tied up in the securitisation that has restricted covenants governing distribution to the parent company,’ it says. The matter should appear in a strategic review, due to be concluded in May. Lehman reckons M&B has six options: cut capital expenditure; cut dividends; refinance; sell pubs; trade out of the situation; or sell the business.

Media reports suggest Marshall Wace, a hedge fund, still wants Punch Taverns to merge with M&B. It is understood to be quietly building a stake in M&B. Punch still has the right to return with a lower offer. Whitbread (WTB) has been suggested by stockbroker Evolution as a potential partner to M&B. This may only take the form of an asset swap whereby M&B would exchange its Innkeeper’s Lodge sites for some of Whitbread’s pubs.