By Tanishaa Nadkar and Noor Zainab Hussain
(Reuters) - Slug and Lettuce pub chain owner Stonegate on Thursday said it agreed to buy larger rival Ei Group <EIGE.L> for 1.27 billion pounds, taking control of some 4,000 additional pubs to become Britain's biggest pub operator.
The deal seals a major turnaround for Ei, which fetched a price tag of 285 pence per share - more than tenfold its value in 2012, when it traded as low as 27 pence a share.
The offer represents a 38% premium to Ei's closing price on Wednesday, and its shares surged almost 40% in morning trade.
Britain's hospitality sector has been rocked by the closure of a number of major restaurant chains this year, while pub operators battle the cost of higher minimum wages as well as a move away from pub drinking by younger Britons.
Analysts at Peel Hunt said the deal would allow Stonegate to at least triple its earnings before interest, taxes, debt and amortisation and provide a substantial pool of pubs to sell off or convert from leased to managed.
Stonegate has a strong track record for acquiring, integrating and converting pubs, Peel Hunt said.
Stonegate, which is owned by private equity fund TDR, is best known for its Walkabout, Yates and Slug and Lettuce chains. In contrast, Ei runs a disparate range of pubs, often in partnership with landlords and small operators, who tailor their menus and entertainment to cater to local customers.
INITIAL BIDS REJECTED
Ei Chief Executive Officer Simon Townsend told Reuters that Stonegate had made an initial unsolicited approach to Ei's board a few months ago, which was rejected as inadequate and subsequent revisions were also turned down.
"There came a point where we were able to achieve a price which the board felt was worthy of engagement and has led us to the place where we are today," Townsend said.
Shares in Ei rivals Mitchells & Butlers <MAB.L>, Marston's <MARS.L>, Greene King <GNK.L> and J D Wetherspoon <JDW.L> all rose on news of the deal.
Ei, which traces its roots back to 1991, has grown through several acquisitions, including that of former Whitbread pubs. It employs more than 1,800 people as a group along with thousands more in the pubs it owns or operates.
Stonegate, which operates 765 pubs in Britain, will assume debt of around 1.7 billion pounds as part of the deal.
Ei will be delisted after the deal and there may be a small number of job cuts, Townsend said.
Ei directors were advised by Deutsche Bank <DBKGn.DE> and Rothschild & Co while Barclays <BARC.L>, Nomura and Goldman Sachs acted as financial advisers to Stonegate.
(Reporting by Tanishaa Nadkar in Bengaluru; Editing by Deepa Babington)