Whitbread ‘committed to a demerger of Costa’

Whitbread ‘committed to a demerger of Costa’

Whitbread has announced that it intends to demerge the Costa Coffee brand. Alison Brittain, the chief executive officer, is investigating a spin-off of the coffee chain.

The hospitality giant, which also owns Premier Inn, released a statement, saying: “Over the last few years Whitbread’s board has rigorously and regularly reviewed its strategy and structure, and has for some time been of the view that separating Premier Inn and Costa, at the right time, would enable long-term value to be optimised. Given the considerable strategic progress that has been made, particularly in developing significant international growth prospects in each business, Whitbread is now committed to a demerger of Costa, providing shareholders with investments in two distinct, focused and market-leading businesses

“Demerger of Costa will be pursued as fast as practical and appropriate to optimise value for shareholders. Appropriate time will be taken to complete critical transformation and infrastructure improvement objectives that will put both Premier Inn and Costa in a strong position to thrive as separate entities.”

Paul Hickman, analyst for Edison Investment Research commented: “The valuation is one thing. Whitbread is currently valued on an FY19 P/E of 16x. Profits are 80% from hotels and 20% from coffee. That should put Premier Inns at around £49 a share and Costa around £10 – a total some 40% above the current price of £42, and equivalent to around £3bn of total value.

“The reality is different. While Premier Inns probably should be freed from its questionable coupling with a coffee brand, the company is attempting to defuse the situation by kicking the can two years down the road. The objective of this tactic is fairly obvious: to maintain or regain control of the situation and draw the fire of the short-term activists. The combined votes of Elliott and Sachem Head are under 10%, a far cry from the 75% needed to vote through a special resolution. The difference is dependent on existing shareholders being convinced that it is in their interests to force the force management’s hand.

“The reason given for the two-year delay – that it will take that long to develop the full potential of Costa – appears rather lame. This is a brand that has been active for over 20 years, and it isn’t fundamentally broken. The fact that it’s buying in its Chinese franchise is a sensible move, but not an existential one – after all the investment of £35m is only 0.5% of Whitbread’s current market value.”

Whitbread also published results for the year to the end of February 2018. Pre-tax profit was up 6.4% at £548m, while revenue rose 6.1% to £3.3bn.