Mitchells & Butlers has been left reeling from the aftermath of entering into a hedge transaction that went horribly wrong. It relied on interest rates and inflation movements going their way ­ but the credit crunch put a £274m spanner in the works.

Despite the disaster, all the directors remained in place bar Karim Naffah, the finance director who set up the hedge. The man who will have to pick up the pieces will be deputy FD Jeremy Townsend who has now taken on the top role.

What happened?

Commenting on the hedging issue, M&B conceded: ‘As the credit crunch worsened, it became clear that even the most modest debt package required for a REIT structure could not be secured and the future prospects for such debt raising have deteriorated further in January.’
FD Karim Naffah fell on his sword after the hedge went south, but as Naffah made his departure it has emerged that KPMG advised M&B on its ill-fated hedging plan.

What’s going to happen?

The initial consensus was that Naffah had made a serious error, but since then the focus on the role of advisers, including debt adviser KPMG, in setting up the hedge has emerged.

Citigroup, JC Rathbone Associates and the Big Four firm had all advised on the deal. The fallout was so bad the company is now fending off the attentions of Punch Taverns, who have tabled a formal bid for M&B.

The hedges were kept open even after the property deal fell apart, with the losses widening during the credit crunch.

A spokesman for KPMG refused to comment on what had happened and what kind of advice it had given, saying only that it had been an adviser to M&B.

M&B added: ‘The board remains committed to value creation and would, if market conditions recovered sufficiently, seek a structure which successfully demonstrates the full value of the property while underpinning the robustness of the operating business.’

In other words, they will be licking their wounds and regrouping for the next push.
All executive directors have given up their 2007 bonus awards in recognition of the large loss suffered by the company from the hedge closure. That gesture will help to appease burnt investors, but their scrutiny of new FD Townsend, and KPMG, is unlikely to relent.