Whit­bread set to spin Costa Cof­fee off from Premier Inn

Sources sug­gest £3bn of value could be re­alised if the com­pany de­cides to break up the two busi­nesses, re­ports Bradley Ger­rard

The Daily Telegraph - Business - - Business -

The emer­gence of ac­tivist in­vestors usu­ally brings with it board­room scraps, an ac­ri­mo­nious tit-for-tat and a bat­tle for share­hold­ers’ hearts and minds. Two ac­tivist in­vestors now con­trol a com­bined 10pc of Whit­bread’s shares, mak­ing a split­ting up of the 250-year-old com­pany into its two con­stituent parts seem more a ques­tion of “when” rather than “if ”.

El­liott Ad­vi­sors re­vealed it had a £400m stake in the Costa Cof­fee and Premier Inn owner at the week­end af­ter it in­creased its hold­ing above 5pc, which meant it had to pub­licly dis­close its in­ter­est under City reg­u­la­tions.

The US hedge fund is known for its bru­tal bat­tles, in­clud­ing its skir­mish with Ar­gentina, which saw the South Amer­i­can na­tion hav­ing to make good on decades-old debt re­pay­ments to Paul Singer’s fund. And in 2015, it forced Kather­ine Gar­rett-Cox, the chief ex­ec­u­tive of the then­largest UK in­vest­ment trust, Alliance Trust, to step aside.

But this time, it seems the ac­tivist – which joined ex­ist­ing shake-up spe­cial­ist Sachem Head – might not need as much brute force. Shares in Whit­bread leapt 7.2pc yes­ter­day to £42.18, the first trad­ing ses­sion where in­vestors could ex­press their view fol­low­ing the dec­la­ra­tion by El­liott. In­dus­try in­sid­ers say El­liott be­gan build­ing its stake in the Dun­sta­ble-based busi­ness just under a year ago and met with se­nior staff at Whit­bread as long ago as 2016.

An an­a­lyst, who did not want to be iden­ti­fied, said it was un­der­stood El­liott would have kept the size of its stake under wraps had it been able to, be­cause the an­nounce­ment did not rep­re­sent a de­sire to kick-start a cam­paign of ag­gres­sive ac­tivism.

This sug­ges­tion is backed up by com­ments from Ali­son Brit­tain, be­low, Whit­bread’s boss, who in Jan­uary said the com­pany re­mains “en­tirely open-minded about the struc­ture of the busi­ness and is fully com­mit­ted to re­view­ing it on a reg­u­lar ba­sis at the board level”.

The for­mer Lloyds ex­ec­u­tive be­lieves the com­pany needs to com­plete its in­vest­ment pro­gramme in Costa, which has in­cluded im­proved kitchen fa­cil­i­ties in its stores, be­fore it gets bogged down in split­ting the £7.2bn par­ent.

There’s also the added in­gre­di­ent of Adam Crozier, the newly in­stalled chair­man, best known for his ma­jor shake-ups at Royal Mail and ITV.

Num­ber crunch­ers at Credit Suisse reckon the value of Costa Cof­fee and Premier Inn as two sep­a­rate busi­nesses would be 40pc higher than the 13-times earn­ings rat­ing now as­cribed to Whit­bread shares based on pre­dic­tions for its 2019 fi­nan­cial year. The ra­tio­nale be­hind split­ting the com­pa­nies is that they can’t be fused more closely to­gether and that it is harder to re­alise fur­ther cost sav­ings with them still under one roof.

“We think the ad­di­tion of El­liott as the group’s largest share­holder will in­crease the like­li­hood of break-up, but also be­lieve there is much wider share­holder sup­port for change,” Credit Suisse said.

This view is partly based on the as­ser­tion that each in­di­vid­ual busi­ness would be able to fo­cus more ag­gres­sively on its pri­or­i­ties – such as in­ter­na­tional growth – with­out the un­nec­es­sary bu­reau­cracy of a par­ent com­pany.

Cut­ting a cen­turies-old com­pany down the mid­dle might or­di­nar­ily prove con­tro­ver­sial, but in the past two decades, one of Whit­bread’s most reg­u­lar ac­tiv­i­ties has been sell­ing off busi­nesses it no longer wanted. The ex­ist­ing co­hab­i­ta­tion of its two brands under the Whit­bread roof are, as its his­toric port­fo­lio sug­gests, sim­ply an anachro­nis­tic quirk.

Samuel Whit­bread, who founded the com­pany in 1742, cre­ated the first pur­pose-built mass-pro­duc­tion brew­ery in the UK when he moved to Lon­don’s Chiswell Street. The firm spent more than 200 years in the beer busi­ness, but in the late Eight­ies to early Nineties, the com­pany found other ac­tiv­i­ties, and went on a spend­ing spree which in­cluded buy­ing David Lloyd Leisure, Mar­riott Ho­tels, TGI Fri­days and Premier Lodge ho­tels.

This smor­gas­bord of com­pa­nies didn’t last long though. In 2000, it sold off its brew­ery busi­ness, and over the fol­low­ing seven years it slowly got rid of all the com­pa­nies it owned out­right or had stakes in, leav­ing it with just Premier Inn and Costa.

The view of other in­vestors seems clear too. When Sachem Head’s pres­ence be­came known late last year, one ma­jor share­holder said: “We think now is the time to con­sider a de­merger of the Costa busi­ness. For many many years we’ve seen [Whit­bread] as a good owner of these busi­nesses and re­sisted calls to break it up. But clearly Costa has not had it as good since. No share­holder would stick with this sta­tus quo of keep­ing these two busi­nesses to­gether for­ever.” An­other lead­ing share­holder said the stock “would rise if Sachem Head gets its way”.

Whit­bread’s shares have started to un­der­per­form on the broader mar­ket. In the past year, the stock is down nearly 3.5pc com­pared to a rise of roughly the same mag­ni­tude by the broader FTSE 100 in­dex. The tough con­di­tions on the UK high street have taken the perk out of Costa’s sales and led some in­vestors to call for a slow­down in store open­ings.

But Costa does now boast a state-ofthe-art £38m roast­ery in Basil­don, Es­sex, which can han­dle 45,000 tons of cof­fee beans a year, com­pared with 11,000 at its old Lam­beth site. Its Ex­press cof­fee ma­chine busi­ness is also sup­port­ing the com­pany’s growth, and were it go to it alone, it could also make the de­ci­sion to bring the sec­ond of two Chi­nese ven­tures in-house, just as it did with one of them last year.

And for Premier Inn, a man­age­ment team fo­cused purely on this busi­ness could forge ahead with its ex­pan­sion into Ger­many and po­ten­tially seek out a pres­ence in other coun­tries.

Sources with knowl­edge of the two ac­tivists sug­gest the pair ex­pect £3bn of value could be re­alised if the busi­nesses were split, with the cost of such a move be­ing as lit­tle as £20m.

If those sums stack up, it doesn’t look like Premier Inn and the “na­tion’s favourite cof­fee shop” will be bed­fel­lows for too much longer.

Whit­bread Brew­ing David Lloyd

Mar­riott Ho­tels

TGI Fri­day’s

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.