Whitbread's Sale of Costa to Coca-Cola Vindicates Activist Investors

By Adam Clark

Shares in Whitbread PLC (WTB.LN) surged nearly 20% in early trade Friday after the company announced the 3.9 billion pound ($5.1 billion) sale of Costa Coffee to Coca-Cola Co. (KO), marking the latest in a series of victories for activist investors in the U.K.

Analysts at investment platform AJ Bell said the deal represents a 575 pence-a-share uplift on previous valuations of Costa, vindicating the arguments of the activist investors who pushed for the separation of the U.K.'s largest coffee chain.

AJ Bell said the sale follows similar activist successes in forcing disposals at mining giant BHP Billiton PLC (BLT.LN) and logistics company John Menzies PLC (MNZS.LN).

"Firms where share-price performance has been weak, operational performance sub-optimal relative to peers or the business structure is complex could come under greater scrutiny," AJ Bell said.

The sale comes unexpectedly quickly after Whitbread, which also owns the Premier Inn budget hotel chain, first flagged a possible Costa spin-off. It said Friday that the sale was in the best interest of shareholders as it provided a substantial premium to the value of a separately listed company and accelerated the realization of cash returns.

Pressure built on Whitbread management after U.S. hedge fund Sachem Head disclosed a stake in the company in December, followed by Elliott Management Corp. in April. Both investors reportedly pushed Whitbread to split Costa from Premier Inn.

At the end of April, Whitbread said it was committed to spinning off Costa into a separate listed entity but only by 2020, sparking criticism from investors. Whitbread Chief Executive Alison Brittain said Friday that Coca-Cola first made a formal approach for Costa in June, although its interest predated the demerger announcement.

Whitbread said Friday the sale would free up resources enabling it to expand Premier Inn in the U.K. and Germany. However, it plans to return most of the money from the sale to shareholders. It didn't say how much would be returned or how it will be done, but said further information will be provided in due course.

"Premier Inn, the U.K.'s leading hotel business, will continue to develop its highly successful and unique business model, with even greater focus and financial investment," Ms. Brittain said.

Sources familiar with the situation said Elliott now plans to push Whitbread to consider strategic options for Premier Inn, which is valued at a discount to global hotel chain peers.

"Premier Inn should not exist as a standalone company in our view, and should be swallowed up by the likes of IHG, Marriott or Accor, operating in concert with a property investor to split the property from operations," said analysts at Canaccord Genuity in a research note.

Whitbread shares at 1251 GMT were up 665 pence at 4,685 pence, having peaked at 4,800 pence earlier in the session.

Whitbread bought Costa in 1995 for GBP19 million, when it only had 39 shops. It now has over 2,400 coffee shops in the U.K. and over 1,400 stores in more than 30 international markets. Costa generated revenue of GBP1.29 billion in its latest fiscal year which ended on March 1.

The sale, which is conditional upon Whitbread shareholder and other regulatory approvals, is expected to complete in the first half of next year.

Write to Adam Clark at [e-mail]; @AdamDowJones

(END) Dow Jones Newswires

August 31, 2018 09:25 ET (13:25 GMT)

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