An activist showdown is brewing at Whitbread Plc, one that may be hard for the owner of Costa Coffee to resist.
Elliott Advisors has acquired a 6 percent interest in the company. Add that to the 3.4 percent already amassed by Sachem Head, and shareholders agitating for change now control close to 10 percent of Whitbread.
Elliott wants to the company to split its two divisions, Costa Coffee and hotels chain Premier Inn. Shares of Costa would be listed separately and distributed to Whitbread’s current shareholders.
Elliott’s push may be tardy -- I argued two years ago that CEO Alison Brittain needed to explore a break up while she was new in the post and had a mandate for radical change. Back then Costa was booming and consolidation was rife in the hotel industry.
But there is still merit in Elliott’s argument. Up until Friday -- before the stake was disclosed -- Whitbread shares had fallen by about 15 percent since Brittain took over. You don’t have to be wildly optimistic to believe that a spin-off would create value.
Whitbread’s enterprise value is currently about 9 times forward Ebitda. Putting Premier Inn on 13 times and Costa on 11 times could generate an extra 3 billion pounds of value. Neither rating looks overly optimistic. The average multiple for the European hotels industry is 13, while Costa’s rating would sit between Greggs Plc, on about 8 times, and Starbucks, on 14. That looks reasonable.
The plan has some complications. Firstly, there would be some extra costs involved, while Whitbread’s pension deficit of 425 million pounds would need to be dealt with. But these are not insurmountable.
Perhaps the biggest drawback is that both companies are exposed to the British consumer, whose income is being squeezed. But, if inflation falls back as expected this year, that pressure could ease. And Whitbread shareholders would still have exposure to any recovery.
The odds on either division being acquired also shorten under the new structure. But in this scenario, not only should they be valued appropriately, but any acquirer would have to pay a premium for control.
Whitbread shares rose as much as 8.6 percent on Monday. That indicates that investors have more faith in a break up than Brittain’s strategy of continuing expansion and cost reductions. That’s an uncomfortable place for any CEO to be.
Whitbread reports 2017 earnings next week, and Costa is likely to have been hit by the arctic conditions on the high street.
If Brittain is to fend off the activist assault she needs to provide compelling reasons why the group should stay together. She has missed one opportunity to break it up. She shouldn’t squander another.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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