ONE of the country’s largest pub operators, Punch Taverns, has approached troubled rival Mitchells & Butlers, owner of the Harvester and All Bar One chains, about a merger that would create a £3.7 billion pub giant.

Punch, headed by chief executive Giles Thorley, has had its eye on M&B for some time. Thorley will come under pressure tomorrow to clarifty his intentions.

Last week, M&B, led by Tim Clarke, announced it was launching a strategic review, in effect hoisting the “for sale” sign. The decision was taken after it revealed it would have to take a hefty £274m loss as the result of closing out a hedging position it had taken as part of a failed attempt to create a property joint venture.

Punch is not the only company interested. Private-equity houses, including Cinven and CVC, are keen as well.

Analysts say a deal with a trade rival is seen as more likely as problems in the debt market make it difficult for private-equity investors to raise the necessary funding for a deal.

Shares in Punch trade at a discount to those in M&B, meaning that paying a premium for control of its rival would be earnings dilutive. A nil-premium merger would solve this problem, but it may not be attractive to M&B shareholders.

M&B’s stock closed at 450Äp on Friday, valuing the company, which also owns the O’Neills and Vintage Inns brands, at £1.8 billion.

Investors, the largest of whom is Robert Tchenguiz, the property tycoon, with a 23% stake, are known to have become frustrated with the situation at M&B.

One institutional investor said they would support the board as long as it worked to bring about a deal quickly.

Although Punch is mainly a tenanted pub company, it has a sizeable managed pub division called Spirit. M&B consists entirely of managed houses. These are run directly by the company as opposed to landlords who pay rent.

Under the Punch proposal, Thorley would assume the chief executive role of the enlarged group and his chairman Phil Cox would head it. This would lead the way for Roger Carr, M&B’s chairman, to leave. Many of M&B’s small shareholders gave their verdict on the way the business has been handled at a testy annual meeting last Thursday. “I would like to see this company run properly,” said one angry investor. Another said: “Some of you seem to think you are financial whizz-kids and would be better off running a hedge fund.”

Separately the pub group behind Slug & Lettuce and Yates’s is in talks with its bankers to renegotiate the terms of its £165m loan agreement.

Laurel Pub Company, controlled by Tchenguiz, hopes to reach agreement with its main lenders, Dresdner Kleinwort and Kaupthing, before the end of March.

Although it has not breached its banking covenants, trading at the group is said to be challenging. The business, like many pub operators, has been hit by the slowdown in consumer spending, the smoking ban and increasing numbers of customers buying drinks more cheaply at the supermarket before going out.

Laurel, which also owns the Ha Ha Bar & Canteen brand, extended its borrowings last May when it arranged a bridging loan to finance its acquisition of the La Tasca restaurant chain.

The group has a deadline of the final week of March to sort out a deal. One insider said: “In the current climate it’s not easy but we are making reasonable progress.”

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