Whitbread (WTB) has decided to demerge its struggling Costa Coffee chain within two years in a bid to drive long-term value and allow its Premier Inn hotels to thrive as a separate entity.
The news should not come as a surprise after activist investor Elliot Capital took a 6% stake in the company earlier this month.
Combined with Sachem Head's 3.4% holding in Whitbread, nearly 10% of the shares were in the hands of parties pushing for change.
Shore Capital analyst Greg Johnson values Costa at between £1.9bn and £2.3bn.
‘The ongoing heavy lifting, including revamping technology and repositioning of the estate, should begin to improve operating performance in the UK, while international remains a key catalyst for value creation,’ says Johnson.
COSTA REMAINS UNDER PRESSURE
Shares in Whitbread are down 1.3% at £41.29 on the demerger news, which has been anticipated for some time as investors digest its annual results.
Underlying pre-tax profit jumped 4.5% to £591m although the tough consumer environment means near-term profit growth ‘may be lower than in previous years’ according to Whitbread.
UK like-for-like sales at Costa continued to fall as consumers cut down on their daily caffeine hit, causing sales to decline 0.4% in the year to 28 February, down from 2% growth in the 2017 financial year.
Hotel chain Premier Inn delivered UK like-for-like sales growth of 2.2%, down from 2.5%.
Lower occupancy rates offset a 1.4% hike in the average rate charged per room (£62.87) and hotel extensions.
Higher capacity and competition from midscale and budget rivals was felt in London. Premier Inn's like-for-like revenue per available room (RevPAR), an indication of how well a company fills its rooms, declined 1.3%.
Outside of London, Premier Inn fared better as like-for-like RevPAR rose 0.9%.
COULD THERE BE A PREMIUM FOR COSTA?
Numis analyst Tim Barratt says there could be an ‘M&A premium’ for an independent Costa, but argues there needs to be a return to growth.
He believes this can be achieved by re-positioning the UK estate away from stores and towards the successful roll-out of Costa Express machines.
Sales from Costa Express soared 18% to £210m in 2018, up from £178m.
AJ Bell investment director Russ Mould flags that spin-offs often outperform the market, highlighting the Bloomberg US Spin-Off index produced a total return of 35% compared to 21.8% for the S&P in 2017.
