Whitbread to split Premier Inn, coffee operations
Whitbread to split Premier Inn, coffee operations
25 APRIL 2018 8:28 AM

During a call with analysts to discuss the company’s full-year 2017-2018 earnings, which saw ADR increase 1.4%, Whitbread PLC executives outlined the 24-month process to split its Premier Inn/Hub by Premier Inn division from its Costa Coffee division.

LONDON—Whitbread PLC plans to create separate management and earnings statements for its Premier Inn and Hub by Premier Inn hotels and Costa Coffee divisions, executives announced as part of the company’s full-year 2017-2018 earnings report.

The two divisions represent the company’s two largest brands, and many of its hotels include Costa Coffee outlets.

The exercise, executives said, is of a pure-play nature and will release cash of approximately £3 billion ($4.2 billion).

  • For a comprehensive outlook on the Q1 earnings season, click here.

The timeline given for splitting the two entities is two years from the announcement. Whitbread CEO Alison Brittain dodged questions from analysts as to the possible sale of Costa Coffee.

An accompanying press release stated that “Whitbread PLC (is) to remain the owner of Premier Inn.”

U.S. hedge funds Elliot Advisors, which has built up its ownership of Whitbread to more than 6%, and Sachem Head Capital Management, which has approximately 3.4% of the British firm, have been pushing for the demerger.

The Guardian reports Sachem Head also asked for a sale and leaseback of the firm’s hotel assets.

Brittain said the decision to separate the two entities was not influenced by activist shareholders.

“These are two independent high-quality businesses … both leaders in their markets. … The demerger will allow us greater international structural opportunities,” Brittain said.

“The demerger of Costa Coffee will be done as fast as is possible and practical,” she said. “We are very excited about this. This demerger has been talked about for an awfully long time. It will unleash the potential of those businesses and allow them to be fully valued by the market.”

The CEO added that “cost structures in our industry remain challenging,” noting the firm is targeting £150 million ($209 million) to £250 million ($349 million) in savings in the next few years, with “£100 million ($140 million) of that achieved over the next two years.”

Hard work ahead
Central to the demerger is ensuring more than 2,000 procurement and supply chain agreements are optimized for the separation of the two businesses, said Nicholas Cadbury, group finance director.

“(Whitbread) is not an easy business to separate,” Brittain said. “We shall be doing (the demerger) alongside the current transformation plan.”

The hotels division still will contain restaurant brands such as Beefeater and Thyme, which also are in many of its hotels.

Brittain said Premier Inn’s underlying operating profit grew to £498 million, while its return on capital increased 3.1% to 13.4%.

The hotel division’s average daily rate increased over the full year by 1.4% to £62.87 ($87.74), and revenue per available room increased 0.2% to £49.85 ($69.57).

Cadbury said RevPAR performed a little better in the fourth quarter of 2017 than in the third, but overall it has been pretty flat.

Revenue for Premier Inn increased 5.2% to £1.91 billion ($2.67 billion) and 5.4% to £1.90 billion ($2.65 billion) in its U.K. assets, he added.

Premier Inn also has a small handful of hotels in the United Arab Emirates.

“In London, where the market is volatile, we still increased sales by 9.1%. … Premier Inn remains ahead of guidance,” Cadbury said.

Performance of the company’s hotels reflected a rebound from international losses due to Premier Inn’s exit of Indian and Southeast Asia operations.

“All of this has allowed us to increase our dividend by 5.6% to £1.01 ($1.41) per share,” Brittain said.

Two main markets
Germany, with its strong lease market, is Premier Inn’s next target, as has been underlined in various other earnings calls, Brittain and Cadbury said.

It is a great time to expand in Germany, Brittain said.

“Declining is the independent sector in both the United Kingdom and Germany,” she added.

In February, Whitbread bought a portfolio of 19 hotels in Germany from Foremost Hospitality Group GmbH for an undisclosed price. All the hotels are leaseholds, and the deal increases the firm’s German pipeline to 31 properties in 15 cities, with a combined room count of 5,720.

All properties in the German pipeline are expected to open by the end of 2020. One property is currently open, and full-year 2018-2019 openings in Germany include 216 rooms in Munich and 182 rooms in both Hamburg and Leipzig.

In all its markets the firm has 74,000 rooms, with the goal remaining 100,000 rooms in the longer term, Brittain said.

In its U.K. market, executives said, occupancy for the full year was 79.3%, with 97% direct bookings.

Eighty-seven percent of its room stock has the brand’s largest design format, Brittain said, and there are 14,750 rooms in the U.K. pipeline.

Capital invested for future openings equals £292 million ($407 million), Cadbury said.

This financial year will see 4,000 to 4,500 new room openings in the U.K. and Germany, Brittain said.

First-quarter 2018 earnings could see some impact from the timing of Easter and the two periods of snowy weather experienced by the U.K. in March, Cadbury added.

As of press time, Whitbread’s stock was up 5.9% year to date. The Baird/STR Hotel Stock Index was down 2.1% for the same period.

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