Costa coffee to be spun-off as competition froths up

By Sam Chambers and Scott Deveau

Whitbread is betting that its Costa Coffee chain will compete more effectively against the likes of Starbucks once it is separated from the company’s hotel business.

The faster-growing Costa will be spun off from Premier Inn within 24 months, Whitbread said.

The planned split follows mounting pressure from activist investors, who said the two businesses sit uneasily together under one corporate roof.

“Coffee shops and hotel rooms don’t make natural bedfellows,” said Hargreaves Lansdown analyst Laith Khalaf.

“The breakup will provide each of the two emerging companies with greater strategic focus on their own goals,” he said.

Costa is the UK’s largest coffee chain, with a market share of 39%, according to researcher Allegra. It leads Starbucks, with a 25% share, and Caffe Nero, with 11%.

Outside of the UK, it has 600 stores, including 400 in China and 107 in the Republic of Ireland. It has signalled its intention to grow in China.

Costa has spread across the UK, where it’s a fixture of downtown shopping districts and train stations.

However, its shops face growing competition from Starbucks and sandwich-focused Pret A Manger and Greggs, and growth has been slowing.

Investors believed Whitbread’s attachment to Premier Inn was restricting further expansion, domestically and in China.

Activist investors Elliott Management and Sachem Head Capital Management have been pushing the company for a breakup.

Whitbread’s Costa business could be valued at £2.39bn (€2.73bn), according to analyst estimates.

Activist fund Elliott said it was pleased Whitbread planned a split and urged the company to move quickly.

“In Elliott’s view, this should be achieved within six months,” it said.

The two-year timeline appears lengthy compared with other UK breakups in recent years.

When Cookson spun off Alent in 2012, for example, it took just seven weeks from the time the plan was announced to completion.

One of the longest recent demergers in the country involved Carphone Warehouse, which broke out TalkTalk as a separate business in 2009 in just over 11 months.

Costa said in a statement that its board “has for some time been of the view that separating Premier Inn and Costa at the right time would enhance focus and enable value to be optimised for shareholders over the longer term”.

The interventions by the activist investors expedited the company’s announcement, chief executive Alison Brittain said.

“The activists’ strategy has been remarkably successful,” said Bernstein analyst Richard Clarke. “The plan is not out of kilter with what management has been saying, but this does feel like a bit of a capitulation,” he said.

As coffee shops proliferate across the UK, Costa has found growth harder to come by in a maturing market.

Greggs and pub operator JD Wetherspoon have both started selling flat whites and cappuccinos for less than Costa. Under Ms Brittain, Costa has also focused on China, where Whitbread plans to more than double its stores to 1,200 by 2022.

Premier Inn has expanded into Germany and the separation of the arms will boost their international prospects, said the CEO.

The planned spinoff comes as competition among the world’s biggest coffee companies heats up, with Nestle acquiring Blue Bottle Coffee and JAB Holding snapping up companies like Keurig Green Mountain and Peet’s Coffee.

“Costa takeover speculation will likely only grow from here,” said Morgan Stanley analyst Jamie Rollo.

Any suitors for Costa may be disappointed by the chain’s current performance. Amid dwindling foot traffic on the UK’s shopping streets, Costa reported its domestic like-for-like sales fell by 0.4% last year, after growth of 2% a year earlier.

- Bloomberg. Additional reporting by Irish Examiner

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