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 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