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Whitbread surges as activist investor Elliott Advisors emerges as largest shareholder

Pressure on the leisure group to break-up the business is growing as Elliott Advisors became the latest US hedge fund to declare a stake in the FTSE 100 company
Costa Coffee
Whitbread without Costa would be like Whitbread without a brewery ...

Shares in Whitbread PLC (LON:WTB) topped the FTSE 100 leader-board on Monday after activist investor Elliott Advisors said it has become the largest investor in the owner of Costa Coffee and Premier Inns.

The US hedge fund released a statement on Saturday, revealing its stake now exceeds 6% of the issued share capital of Whitbread. Around 11.50am, Whitbread shares were 6.7% higher at 4,197p.

READ: Whitbread sales slow on Costa decline but break-up speculation lifts shares

The fund is pushing for Costa Coffee to be demerged from Whitbread as it sees little overlap between the coffee chain and the rest of the Whitbread business, which also includes the Brewers Fayre and Beefeater restaurants.

Elliott is not the only hedge fund that has an interest in Whitbread; New York-based Sachem Head Capital Management owns 3.4% of the company and has reportedly had talks with Whitbread's management about breaking up the group.

Whitbread's chief executive, Alison Brittain, has said the group is open-minded about its structure – it has a history of reshaping the business, having started out in 1742 as a brewer – but also warned against a knee-jerk reaction to difficult trading periods.

In January, the leisure group reported slowing sales growth in its fiscal third quarter.

UK like-for-like (LFL) sales in the 13 weeks to November 30 rose 0.3%, compared to a 1.7% increase in the same period a year earlier.

Premier Inn LFL sales climbed 0.5% while Costa LFL sales fell 0.1%, prompting fears that the expansion of the Costa brand in the UK has reached saturation point.

Reports in the Sunday Times indicate that Elliott believes up to £3bn in value could be created by splitting the businesses, which is equivalent to 1,650p per share.

Natural end-game

Broker Numis takes a look at the latest development in the Whitbread saga, with almost 10% of the company's shares held by activist investors.

“In our view it is entirely logical that the two businesses be split at some point, as the natural end game to the unpicking of the conglomerate. A demerger would be easiest to execute although trade sale would clearly crystallise a control premium.

"An IPO is unlikely, unless WTB wishes to generate cash for reinvestment such as in Germany,” Numis said, adding that it reckons the most likely trade buyer in its view would be JAB, although global consumer companies may also show interest.

“The market is likely to look through a period of gently negative earnings momentum if the prospect of a demerger is realistic. The main difficulty is knowing whether Costa could attract a premium from an outright sale, or where a low(ish) growth Costa would trade,” it concluded, as it stuck with its 'hold' recommendation.

Deutsche Bank (DB) is bullish on the stock and is expecting the company to report full-year revenue of £3.32bn, up 7% year-on-year, and underlying earnings (Ebit) of £615mln when it issues results next week.

In a results preview issued before news of Elliott's stake emerged, DB said: “Despite ongoing deceleration in like-for-like revenue growth, we think this will be offset by efficiencies and see positive risk/reward to shares.”

“We believe the presence of activist investor Sachem Head as a shareholder is providing a support for the shares,” DB concluded.

 -- Updates share price --

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