A leading analyst has said that the restructure of budget hotel operator Travelodge could benefit rival the Whitbread-owned Premier Inn and Spirit Pub Company, with read-across potentially positive for the pub operator.
Geof Collyer said that Spirit’s management will be watching very closely the progress of discussions at Travelodge regarding lower rent potential at 109 of its hotels.
He said: “We see this as an attempt to persuade Prestbury to reduce its rents on the sale & leaseback contracts signed by Permira prior to selling the OpCo to Dubai International Capital (DIC) for 15x EBITDA back in 2006. Spirit has very low fixed charge cover (1.5x) partly because a previous generation of management did the same thing with Prestbury for £500m of pubs back in 2004. Around 100 of the 200 pubs in that S&L deal have since returned to Spirit through reversionary leases (as the buyers have either gone bust or gone through pre-pack administrations) and are costing the company an estimated £32m a year in rents (half of the total rent bill).”
Collyer said that the CVA and the comments regarding Travelodge by the Whitbread chief executive Andy Harrison on its last call (slightly misinterpreted by the market in the analyst’s view) have partly been behind the recent Whitbread share price rise.
He said: “So it is possible that the market will take the prospect of a recapitalised and reenergised Travelodge as a negative relative to Whitbread.”
Collyer also argued that a smaller, more rational Travelodge should benefit Premier Inn over time.
He said: “Travelodge has only been given till end 2017 to pay off the remaining £285m of debt, so we see the new owners seeking a more sensible, possibly less aggressive stance on pricing to rebuild the hotel chain’s cashflows. As part of the new ownership, there will be £55m of much-needed catch-up capex to refurbish around one-third of the hotels, with about 10% seemingly destined to be handed back to landlords or other operators. The new owners will also seek to renegotiate rents on a further 20%.
“A smaller, more rational Travelodge should be better for Whitbread’s Premier Inn over time, but a potentially negative read-across from this expected Travelodge situation was partly behind our recent downgrade from Buy to Hold at Whitbread.”
