M&B takes a £274m hit after rates-bet fiasco

Pubs chain Mitchells & Butlers is taking a hit of £274 million - more than a year's profits - to pay for a disastrous bet on interest rates.

The group behind All Bar One and O'Neill's is paying the price for tangling with Robert Tchenguiz, the property tycoon who is reeling from losses on his three most high-profile investments.

Last year Tchenguiz persuaded M&B to split off its property arm to rake in rental income.

The deal required M&B to issue bonds and bankers said the company needed to take out hedges against inflation and the chance that interest rates would rise before the bonds could be parcelled up and sold. As the credit crunch bit the deal fell apart, but the hedges remained in place and have spiralled into the red.

Today M&B said it was closing the positions, a decision likely to provoke derision among analysts and investors who always doubted the wisdom of the scheme. The shares fell 5½p to 387½p.

Finance director Karim Naffah has resigned with immediate effect. Chief executive Tim Clarke also offered his resignation, which was refused by the board, but there are serious doubts that he has the confidence of investors. None of the directors will get a bonus this year.

Tchenguiz, who is nursing losses of around £500 million on his holdings in M&B, J Sainsbury, and computer games group SCi, has upped his stake in the pubs company by 3% to 22%.

M&B blamed the credit crunch, but also hinted at less-than-stellar advice from banks - believed to be Citigroup and Royal Bank of Scotland. The firm, which owns 2000 pubs, said it had begun a "strategic review", suggesting it is up for sale. Before Christmas there were rumours of tentative merger talks with Punch Taverns.

M&B is also coping with a tough business environment. In the 17 weeks to 26 January like-for-like sales edged up 0.7%. A statement today said trading conditions "are set to remain highly challenging" and that the board "very much regrets" the loss from the hedges.

Clarke said plans to spin off the properties into a Real Estate Investment Trust had been shelved. Asked if he had the support of the City, he replied: "We will be putting our case today."

Jeremy Townsend, the deputy finance director, will step up to replace Naffah.