Whitbread’s announcement that it would seek a demerger of Costa within two years may not have been a surprise given months of speculation but according to Dominic Walsh it has left a number of questions unanswered. He discusses the situation, as well as expressing sympathy for Luminar founder Steve Thomas’ current woes.
What to make of Whitbread’s decision to announce it would be splitting itself in two within the next two years? This was a statement that begged far more questions than it answered.
This was not, as chief executive Alison Brittain admitted, a statement the leisure operator would have wanted to be making at this point. She told me that, in an ideal world, she would have been making it in a year’s time. But, when two activist investors – Sachem Head and Elliott Advisors – together speaking for about 10% of the shares, both made clear they wanted a demerger, the pressure to confirm a split became too heavy to resist.
Given that Ms Brittain had been making increasingly positive comments on a possible demerger, making clear that it was a question of when rather than if, it felt like the activists were pushing at a door that, if not open already, would swing soon. The former Lloyds banking executive just wanted more time to complete the turnaround on Costa and bed in credible, more focused international strategies for Costa and Premier Inn. Her analogy was: why would you dispose of a house when you were still completing a refurbishment?
Except that she wasn’t planning to sell Costa, but rather spin it off as a separately listed company, with each Whitbread investor getting one share in Costa for each share they hold in Whitbread. In other words, as the two activists claimed, the issue of value was irrelevant to a demerger as the Costa refurb could simply carry on as a standalone business.
Both hedge funds made it pretty clear they were upset by the two-year timeframe, which they felt didn’t square with Whitbread’s promise to effect the demerger “as fast as practical and appropriate”. Are they right to say that, because it’s a demerger rather than a sale, it won’t harm either business if the split happens in the next six months or so?
In my opinion, splitting the business in two at this point in the valuation cycle would make both Costa and Premier Inn vulnerable to bids from trade rivals or money-bags private equity firms. At the £1.9bn to £2.3bn valuation put on a standalone Costa by analysts, the chain would be very digestible, while Premier Inn’s estimated asset base of £5.4bn would prove a hugely tempting target for the likes of a Blackstone or Colony Capital, for whom selling a company’s assets then later flogging off the operating business has become bread and butter.
Or, perhaps Premier could interest the ever-acquisitive AccorHotels.
While I’m sure Ms Brittain would love to be given the luxury of two years to complete the transformation process and push through her £250m cost cutting programme before pressing the button on a split, it does feel like an unlikely scenario. If I were Sachem Head or Elliott I’d be knocking on fellow shareholders’ doors to garner support to up the pressure on the Whitbread board. Word is that, in a number of cases, they would be pushing at an open door.
One theory is that, while professing to favour a demerger of Costa, Ms Brittain recognises that the public statement has effectively put the coffee shop chain in play while also putting a Costa-free Whitbread at risk of a bid. That being the case, so the theory goes, Ms Brittain could – or should – be thinking about flogging off Costa to the highest bidder then using the proceeds to beef up Premier Inn with a chunky acquisition in hotels or an adjacent sector like serviced apartments or hostels.
It may sound a trifle contrived or fanciful, but Ms Brittain comes across as a strategic thinker who, having presided over Whitbread’s 275th anniversary celebrations last year, would not want to be remembered as the woman who was at the reins of the Whitbread shire horses when time was called on that long and distinguished history.
Sad news about late-night legend
When I heard that former Luminar boss Steve Thomas had been declared bankrupt, I made a decision not to write about it unless the news appeared elsewhere. This is not, as anybody who knows me will testify, my normal modus operandi, but for once I was persuaded – by a mutual friend – not to put pen to paper.
Why? Well, call me a softie, but in the good old days of Luminar, when Thomas was the unchallenged king of the dancefloor, we always got along very well in what I hope and believe was a mutually beneficial relationship. I know his forthright character was not everybody’s cup of tea, and Luminar eventually ended up going bust, but speaking personally I always found Steve to be a straight shooter. Ask him a straight question, and 99 times out of 100 I’d get a straight answer.
Given that a simple Google search throws up confirmation of his bankruptcy, you may well ask why I decided not to write about something in the public domain. I guess the answer is that, based on the chat I had with our mutual pal, I knew Thomas was very upset by what had happened and that he was hoping it might pass unnoticed.
He was probably a little naïve to think that, particularly given that he rubbed more than a few people up the wrong way during his long (and mostly distinguished) career in the late night market.
For what it’s worth, I understand that the reason he found himself in this terrible position is that he received bad advice on his tax affairs from an accountant or financial advisor and was suddenly slapped with a demand to pay several years of back tax with immediate effect. When his protracted attempts to negotiate a settlement with the taxman failed, he found himself with no alternative but to declare himself bankrupt, a personal disaster for such a proud man, and at an age – 65 – when he should have been slipping gently into retirement to enjoy the fruits of his success rather than fighting for his financial survival.
Dominic Walsh is a business reporter at The Times, covering the leisure, tobacco and drinks industries