Pubs and bars operator Mitchells & Butlers (MAB) must have very patient investors given it has lagged its rivals for many years. It’s a great example of a business with decent scale in the UK but which seems stuck in the mud.

Investors have lost 10.3% over the past five years by owning shares in Mitchells & Butlers, even when factoring in dividends. In comparison, you would have enjoyed 20.4% total return from sector peer Marston’s (MARS) and 8.7% from Greene King (GNK).

And the news remains poor from Mitchells & Butlers which just announced a dividend cut despite delivering results in line with expectation.

The Harvester and O’Neill’s operator has also warned investors they are unlikely to get any dividend at all in the first half of the new financial year due to cash constraints.

That’s a real shame given it started 2017 on a stronger footing thanks to an impressive 2016 Christmas trading update. At the time chief executive Phil Urban said Mitchells & Butlers was starting to benefit from the ‘many initiatives’ it had put in place.

Very large debt position

Mitchells & Butlers’ net debt now stands at £1.75bn, equal to 4.2 times net debt to EBITDA (earnings before interest, tax, depreciation and amortisation), which is a very uncomfortable position. It also has a £451m pension deficit.

In May, analysts at HSBC applauded actions to convert pubs to new brands, as well as livening up old sites, as that gave a boost to sales.

Two months later the pub company reached an agreement where it wouldn’t have to raise its annual cash payments to its pension beyond the current £46m per year level. That was a step in the right direction, but perhaps not enough for everyone.

Following a trading update in September, investment bank Liberum commented that a large part of the capital expenditure on Mitchells & Butlers’ estate should only be considered as ‘catch-up’ maintenance. It said the company should have produced much better sales figures given the significant investment over the previous two years.

Fast forward to the present day and some analysts are worried the company won’t be able to grow like-for-like sales by enough to offset cost pressures. That’s not good news for a company with a stretched balance sheet.

Time for a rights issue?

A cash injection might put Mitchells & Butlers in a stronger position to cope in a more difficult trading climate, but who would want to back the company unless it offered a heavily discounted rights issue?

Well, several of its largest shareholders have held the stock for a long time so they may have a greater appetite to support the business than you might initially think.

Veteran currency trader Joe Lewis owns 26% of the company and a further 22.6% is owned by horseracing tycoons John Magnier and JP McManus. Lewis made a 230p offer for the business in 2011 - not too far off the current 265p price.

Mitchells & Butlers seems insistent on maintaining capital expenditure to avoid losing market share, so getting rid of the dividend is the obvious first step - and the easy bit.

Most listed companies wait until they are in the danger zone before contemplating a rights issue. For this pub company, perhaps it should be more proactive and get the cap ready in its hand? (DC)