Costa sale frees up Whitbread for budget-hotel growth
 
Costa sale frees up Whitbread for budget-hotel growth
31 AUGUST 2018 8:23 AM

For the past year, Whitbread PLC has said its Premier Inn hotel and Costa coffee divisions would be split, but now it has announced Costa’s sale to Coca-Cola in a deal worth £3.9 billion ($5.1 billion) that will allow it to concentrate on its U.K. and international budget-hotel expansion.

DUNSTABLE, England—Whitbread PLC has become a pure hotel player following the agreed-to sale of its Costa high-street coffee chain to United States soft-drink manufacturer Coca-Cola for £3.9 billion ($5.1 billion).

A news release states the sale price represents a multiple of 16.4 times Costa’s full-year 2018 earnings before interest, tax, depreciation and amortization and that “a significant majority of net cash proceeds (is) intended to be returned to shareholders.”

Whitbread owns the Premier Inn and Hub by Premier Inn brands. Hub has nine properties, but Premier Inn has more than 750, mostly in the United Kingdom but also in Ireland, United Arab Emirates and Germany.

Whitbread CEO Alison Brittain told Hotel News Now during a media call that “very early in my tenure (as CEO), I made the decision to exit India, Thailand, Singapore, anywhere we felt did not have the right mass. We will concentrate international expansion in Germany.” She added other countries in Northern Europe also will be considered in expanding the company.

“Germany is a bigger market than U.K. and more fragmented, with not such a large budget share. Whitbread will focus on attractive structural growth on opportunities for Premier Inn in the U.K. and Germany,” she said.

Premier Inn is set to become the fourth-biggest hotel company in Germany, cementing its presence over the next 15 years, she said.

Nicholas Cadbury, group finance director, said the deal also will allow Whitbread to address its pension deficit of approximately £350 million ($454 million) and “some of the volatility in the cash structure of the company.”

“There is also the opportunity to deleverage over the short and medium term,” Cadbury said. “We are very comfortable to maintain our leverage guidance to below 3.5 times … to allow us firepower to move faster and accelerate in the U.K. and Germany.”

Brittain said at that time Whitbread had 72,879 opened rooms in the U.K., and 14,000 in its committed pipeline for the region. She added now that the firm has a “line of sight to over 100,000 rooms” in the U.K.

A win-win
Russell Kett, chairman, London, of business consultancy HVS, said it was well known that Whitbread wished to split the company but the outright sale of it came as a pleasant surprise.

“I was really tickled when I heard the news. It made my heart warm. The market should like this, and it is demonstrating the Whitbread board has put its money where its mouth is, that it is taking action. Yes, in a slightly different way than it perhaps originally intended, but this is good news for both sides of its business,” Kett said.

“There are synergies between Premier Inn and Costa, and many hotel companies now provide branded coffee outlets. As Premier Inn is no longer tied to Costa, it, too, is free to forge its own deals, although that is not the particular issue here.

“Costa has been run separately in any event, and I see no potential impact on management and staff at Premier Inn, which is now a self-contained unit. I really see it as a win-win for all concerned,” Kett said.

With Whitbread now a single-focus entity, it can put a lot more focus on the internationalization of the budget hotel sector, he said.

“Like it or not, Premier Inn is not the international and global company that it could become along the lines that (AccorHotels) has done with (its) Ibis (brand),” Kett said.

“This could really enable (Premier Inn) to become a leading budget player in far more countries than it is at the moment. The thing with a budget brand is that you must have critical mass in every country you wish to go into. It is no good having three hotels. You need 50, 100, and only then can you reach critical mass and start seeing returns.”

Kett agreed Premier Inn’s international push would initially be in Germany but that worldwide expansion is not off the books.

Whitbread has a German Premier Inn pipeline of 13 assets, which together with its February 2018 addition of 19 hotels from Foremost Hospitality Group GmbH will result in a total German room count of approximately 6,000.

“There is no reason (Premier Inn) could not become the leading player in Germany, but if I was Premier Inn, I would be asking: In which countries can we get critical mass by branding or building? There are many countries where it is still possible to build and develop,” Kett said.

Brittain said any future portfolio acquisition in Germany would not affect proceeds from the Costa sale being returned to shareholders and that she did not feel Whitbread was “capital constrained.”

Not bitter
Whitbread reportedly has been under pressure from activist shareholders, notably Elliott Advisors and Sachem Head, to realize additional value either by splitting or selling Costa.

Brittain denied that pushed the sale forward or even instigated it.

“Not only is the valuation compelling in its own right, as it is significantly higher than currently reflected for Costa in the Whitbread market value, but it also represents a substantial premium to the value that would have been created through the previously announced demerger,” she said.

Brittain said synergies between the seller and buyer allowed Whitbread to push the sale price and that the transaction is expected to be finalized in 12 to 24 months.

“The deal was literally done in five weeks,” she said, adding Coca-Cola had made overtures before Whitbread announced it intended to split its two divisions.

“A range of suitors” also have shown interest, Brittain said. The deal might have been sped up by Coca-Cola’s CEO James Quincey being British and thus very familiar with the Costa brand, which is not well known in the U.S., she said.

Whitbread bought Costa in 1995 from the Costa family, while it sold its brewery, brewing and liquor interests in 2000. As such, the August 2018 sale represents the first time since the firm’s founding in 1742 that it has not been involved in the beverage business.

The purchase price for Costa in 1995 was £19 million ($24.7 million), according to the Financial Times, although the chain has enlarged from approximately 40 stores to almost 4,000.

In a call with analysts, Brittain said the deal will allow Whitbread to reduce its debt and “provide additional headroom for the expansion of Premier Inn.”

During an earnings call in April, Brittain said “(Whitbread remains) committed to demerging Costa as fast, as practical and as appropriate as possible to optimize value to our shareholders.”

The London Stock Exchange lists Whitbread’s market capitalization as £7.382 billion ($9.6 billion), which takes into account both its hotels and coffee divisions.

At press time, Whitbread PLC stocks were up 17.3% year to date. The Baird/STR Hotel Stock Index was down 1.25% for the same period.

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