A potential break-up of Whitbread could be signalled as early as Wednesday’s full-year results, as speculation grows that the group is becoming more receptive to the idea of spinning off its Costa coffee division.
Activist investors that have built up stakes in the group over the past year believe that Whitbread would be best split into its two component parts, Costa and the Premier Inn hotel and restaurant chains – the latter including restaurant brands such as Brewers Fayre and Beefeater.
According to the Sunday Times, City sources believe Whitbread’s chief executive, Alison Brittain, is “not philosophically opposed” to hiving off Costa from Whitbread and believes it is a case of “when, not if”. Brittain has already announced plans to beef up the chain, including further expansion in China, and more branches in rail and air transport hubs, while continuing to cut costs across the group. Analysts are expecting Brittain to spell out more cost-cutting measures on Wednesday.
Pressure for a break-up has been brought to bear by US hedge funds, which have increased their shareholding in recent months. Elliott Advisors last week announced it now had a stake in Whitbread of more than 6%, becoming the largest investor in the company, and is expected to add to its £400m investment.
While it has made no formal comment, Elliott’s position is understood to be that Costa should be a separate entity from the Whitbread group, as Costa and Premier Inn are largely run as separate businesses with minimal overlap in the management teams. In this thesis, Whitbread is trading at a discount as one corporate entity, and creating a standalone Costa would boost the value of both relatively painlessly by up to 40%, or £3bn – an idea treated with some scepticism by other industry observers.
Another activist investor, Sachem Head, which has bought up a 3.4% holding in Whitbread, is also seeking to separate the company’s two major brands. News of Elliott’s growing shareholding helped push Whitbread’s shares nearly 8% higher last week, suggesting that other investors believe a split would be desirable.
Costa represents about 30% of Whitbread’s business, contributing £158m to the group’s £565m pre-tax profit last year, and has grown to be by some distance Britain’s biggest coffee chain, with more than 2,300 shops in the UK, and a further 1,300 in 29 other countries. However, despite Costa opening about 100 stores last summer, sales growth slowed to a near standstill – blamed on the weather and declining consumer confidence after Brexit – causing first half 2017-18 profits and Whitbread’s share price to slide.
Whitbread declined to comment.
