Whitbread froths up as activist investor Elliott emerges

Shares in Whitbread have climbed on the expectation that two activist investors could force management to spin off its Costa Coffee chain from its Premier Inn business.

Elliott Advisors has built up a 5.3% stake in the FTSE 100-listed company, a regulatory filing confirmed on Monday, though the total stake is reported to be nearer 6%.

The US hedge fund, which reportedly bought into Whitbread a year ago, is to press for a demerger of Costa, the Sunday Times reported.

Elliott, with $34bn of assets under management and a long history of activist campaigns to improve shareholder value, is reported to believe that splitting Costa from Premier Inn would take Whitbread four to five months and cost less than £20m, in order to release around £3bn of additional value.

Elliott is the second US activist investor on the register, with Sachem Head having bought a 3.4% stake in in December., meaning that close to 10% of the company is now held by activist investors. Sachem, headed up by Scott Ferguson, a protégé of notorious Pershing Square Capital activist shareholder Bill Ackman, has 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.

Whitbread chief executive Alison Brittain, speaking at the release of a weak set of third-quarter numbers at the start of the year, said it was not the right time to consider a break-up as she was about halfway through a "significant transformation plan". But the ex-banking boss said that the board was “very open-minded” about options to increase shareholder value.

Whitbread, where Adam Crozier replaced Richard Baker as chairman last month, is due report its full year figures next week on Wednesday, 25 April.

Shares in Whitbread were up more than 6% to 4,194p on Monday morning, adding to a 3.3% rise on Friday.

"This will inevitably lead to much speculation this morning on the numerous corporate changes that could occur at Whitbread," said analysts at Stifel, adding 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 subdued outlook for UK consumer stocks and the difficult recent trading at Costa, we are 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."

Broker Canaccord Genuity said: "For Whitbread the opportunity 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."

Its analysts said Whitbread is "under-leveraged" with net debt/EBITDA of just 1.1x for FY18E and circa £4bn of freehold assets on the balance sheet.

"The position of the Whitbread pension trustees potentially adds a complication to any break-up as the FY17 deficit was circa £400m with Whitbread paying £95m per annum in contributions."

Numis, noted that a £3bn of extra value would be equivalent to 1650p per share or a 3.5x EBITDA turn on the whole group, said: "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.

"A demerger would be easiest to execute although trade sale would clearly crystallise a control premium. An IPO is unlikely, unless WTB wishes to generate cash for reinvestment such as in Germany. The most likely trade buyer in our view would be JAB (bought Peet's for 22x EBITDA in 2012) but global consumer companies may also show interest."