Analysts see value in Whitbread break-up

With 10% of Whitbread shares now in activist investor hands following the emergence of Elliott Advisers, analysts from Credit Suisse, Stifel and Numis offered varying opinions on how much value can come from the breaking-up of the Costa Coffee and Premier Inns owner.

Elliott has confirmed that is has amassed a near-6% stake which together with Sachem Head, which revealed its 3%-plus sake in December, means roughly 10% of the shares are held by activists.

Sachem has reportedly been pushing for the separation of the property from the hotel assets, a re-leveraging of the balance sheet, and the separation or sale of Costa, while Elliottt is said to just be pursuing a spin-off of Costa rather than "any other financial engineering".

Whitbread shares were up 6% to 4,180p as midday approached on Monday.

Credit Suisse said it saw a 26% potential upside to 4,950p as the addition of Elliott as the group's largest shareholder "will increase the likelihood of break-up".

The Swiss bank believes there is "much wider shareholder support for change" and that a split of Premier Inn and Costa "makes sense", with the current price "inconsistent" with the long term competitive advantages of each business and a sum-of-the-parts valuation that implies 40% potential upside.

January's update showed that current trading isn't easy, while the combined corporate agenda is "very full", with Costa facing structural challenges from its high street focus and both business striving for material UK space growth, with international aspirations, cost inflation pressures and management's saving plan alongside Costa's wide range of operational initiatives to improve positioning.

If management want to fight the break-up, Credit Suisse said "other levers could be pulled", noting Whitbread's £5.4bn of freehold property, potential for restructuring the low-return pub restaurant business and for extending the efficiency mindset and the £150m cost saving target.

Morgan Stanley's take was that the while the reported push for a Costa demerger is "likely leading to further speculation" that "should support the shares", as Costa is only 25% of profit/EV, "investors need to believe in more for outsized returns".

A demerger of Costa "could remove the risk the business is sold too cheaply" amid the turnaround and "seems relatively lower risk" versus a disposal of hotel real estate that "risks taking on more expensive long-term leases, losing control of the asset/product, and reducing investment opportunities" or a disposal of the pub restaurants that "risks dis-synergies given nearly all are co-located adjacent to a Premier Inn".

Analysts at Numis noted that the £3bn of extra value perceived by Elliott would be equivalent to 1650p per share or a 3.5x EBITDA for the whole group.

"In our view it is entirely logical that the two businesses be split at some point, as the natural end game to the unpicking of the conglomerate," Numis said, seeing a demerger as easiest to execute although trade sale would clearly crystallise a control premium, with Krispy Kreme and Caribou Coffee owner JAB seen as most likely trade buyer or a range of global consumer companies. "An IPO is unlikely, unless WTB wishes to generate cash for reinvestment such as in Germany."

Broker Stifel noted that "many US investors" view Whitbread in a different light from mainstream UK investors, more as an investment in hotels, property and Costa together with a lightly geared financial structure.

"We consider it is very unlikely that the current management would separate the freehold assets from the hotel business, or move to a more leveraged financial structure. However, it is possible that Costa could be separated from the rest of the group, particularly if an attractive offer arose for that business."

With the current UK consumer outlook and Costa's difficult recent trading, Stifel was "not convinced" that a demerged Costa would attain a higher rating than Whitbread currently does.

"Such a step may, however, be a move towards exploiting value from both parts of the group and would certainly encourage corporate activity. Our sum-of-the-parts valuation is £48.50 per share."

Panmure Gordon noted that CEO Alison Brittain’s tone "has become noticeably more conciliatory to shareholder demand, which will make next week’s finals interesting" and estimated each turn of Costa EV/EBITDA is worth £235m/130p per share.

"The challenge is why sell now when LFLs are flatling and market is worried about the high st, having rebutted demands to sell over the last 8 years when LFL averaged mid-single digit growth? If CEO Alison Brittain can demonstrate self-help initiatives are working and Costs LFLs inflect in H2 then Costa would be primed for sale.

"The other angle, spinning off property, feels like a non-starter given than i) SLBs would increase operational gearing, ii) the Board consistently advocate benefits of freehold ownership, iii) WTB doesn’t really need the cash proceeds."

Over at Canaccord Genuity they said Whitbread was "under-leveraged" with net debt/EBITDA of just 1.1x for FY18E and circa £4bn of freehold assets on the balance sheet but pointed out that the position of the Whitbread pension trustees "potentially adds a complication to any break-up" as the last year end deficit was circa £400m with Whitbread paying £95m per annum in contributions.

For Whitbread's management the opportunity to sell to investors if trying to avoid a break-up, "is to turn interesting international bridgeheads into material growth opportunities for both Premier Inn and Costa Coffee. For Premier Inn the focus is on Germany and for Costa Coffee the focus is China".

In a preview of the full year figures due next Wednesday, Deutsche Bank said Whitbread was "one of the cheapest stocks" in the sector on a rating of circa 14.5 times earnings, even before the emergence of Elliott.