Is a split brewing at Costa Coffee owner?

It seems to be quite the season for major companies to contemplate breaking themselves up.

On Tuesday, General Electric, one of America’s biggest and longest-established conglomerates, said it was considering a split.

On Wednesday, Rolls-Royce, the aircraft engine maker, announced it was prepared to sell its loss-making marine division, earning itself a boost to its share price in the process.
And, elsewhere in the industrial sector, GKN, one of the UK’s oldest engineering companies, has responded to a takeover approach from Melrose Industries by setting out plans that could ultimately lead to the separation of its aerospace and its automotive operations.
Thursday brought the latest example leisure giant Whitbread admitted a break-up of its businesses was also possible.
The company is under pressure from an activist investor, Sachem Head, to pursue such a policy in order to increase the value of its individual businesses.
The route thought to be most favoured by Sachem Head, which has built up a 3.4% stake in Whitbread, is a demerger of its Costa Coffee chain.
This would leave Whitbread, which last month celebrated its 275th anniversary, as a focused hotel and restaurant operator.

Image: Whitbread also owns Premier Inn
It owns Premier Inn, Britain’s most successful budget hotel chain, and the Beefeater and Brewer’s Fayre pub-restaurant chains.
The assumption until now has been that Whitbread, which began life as a brewer but which actually sold off its brewing business as long ago as 2000, was wedded to its current corporate structure.
But Alison Brittain, the chief executive, said on Thursday: “We remain entirely open-minded about the structure of the business and are fully committed to reviewing it on a regular basis at the board level”.
That was enough to send shares of Whitbread up by almost 4% in spite of the fact that the company also revealed that UK like-for-like sales at Costa fell by 0.1% and were flat in its hotels division during the 13 weeks to November 30.
It blamed challenging trading conditions.

Ms Brittain, a career banker who took the helm of Whitbread two years ago, insisted that, at present, Whitbread believes it is still the right owner for Costa.

Image: Alison Brittain is chief executive of Whitbread
It is a business that Whitbread bought for just £14m 23 years ago and which it has built up into the world’s second-largest standalone coffee shop chain after Starbucks and the world’s third-largest coffee retailer after Starbucks and McDonald’s.
The case for retaining Costa is that, at present, the business is not yet big enough to stand on its own two feet.
Whitbread argues Costa still requires investment in order to expand and that its balance sheet is robust enough to do that.
The company is also only half way through a transformation plan for Costa that it expects to generate significant value for shareholders.
Ms Brittain has also pointed out that, while there have been some calls for Costa to be sold rather than demerged, there are likely to be few buyers emerging for a business that remains heavily dependent on the UK market at a time when there are lots of questions about the strength of consumer spending right now.
Whitbread would probably not get as good a price as it might were conditions to be better in the market.
The irony is that, during the last two decades, Whitbread has disposed of numerous businesses.
Apart from its brewing arm, sold to the Belgian giant Interbrew (now part of AB InBev) for £400m, it has also offloaded the Marriott Hotels business in the UK, the TGI Fridays restaurant chain, its half share in Pizza Hut UK and the David Lloyd Leisure fitness club chain, as well as its shareholding in the soft drinks maker Britvic.
So this is a company that has never shied away from selling assets if it makes sense to do so and which has shown a remarkable lack of sentiment in the process – the brewing sale in May 2000 being the best example.