The company said in a statement that the demerger of Costa is expected to be completed within two years and it will be listed as a separate business. Whitbread will remain the owner and operator of the Premier Inn hotel chain.
Shares fell 1.5% to 4,122p in morning trading.
Whitbread today announces it is committed to a demerger of Costa, which will provide shareholders with an investment in two distinct, focused and market-leading businesses. Read the full announcement here: https://t.co/vV1fMcKNWh— Whitbread plc (@WhitbreadPLC) 25 April 2018
"We are confident that both Premier Inn and Costa will soon be businesses of sufficient strength, scale and capability to enable them to thrive as independent companies,” said chief executive Allison Brittain.
"The board, therefore, believes that it is in the best long-term interests of Whitbread's many stakeholders to separate Premier Inn and Costa, via a demerger of Costa."
The move comes after activist investors Elliott Advisors and Sachem Head, which together control 10% of shares, urged Whitbread to split the business into two.
Costa spin-off 'makes sense', says analyst
"Coffee shops and hotel rooms don’t make natural bedfellows, so splitting off Costa Coffee from Premier Inn makes sense for Whitbread," said Laith Khalaf, senior analyst at Hargreaves Lansdown.
"The break-up will provide each of the two emerging companies with greater strategic focus on their own goals, and will allow investors to choose which of the two distinct brands they actually want exposure to.
"There are issues to addressed, such as the pension scheme and the process of setting up a separate board, though the 24 month target for the demerger allows plenty of time for these matters to be resolved."
Whitbread's 2018 revenues and profits rise
Alongside the announcement, Whitbread reported a 6.1% rise in 2018 revenue to £3.3bn and a 4.5% rise in underlying pre-tax profit to £591mln.
Costa delivered revenue growth of 7.5% for the year, driven by a strong performance by the Costa Express self-service coffee bars and the addition of 204 net new stores in the UK.
Premier Inn posted a 5.2% rise in revenue after adding more than 13,700 new rooms in the UK.
In fiscal year 2019, the group plans to open 4,000-4,500 Premier Inn rooms in the UK and Germany along with 230-250 net new Costa stores globally.
The company said investment in the businesses will continue to maintain competitive advantage but warned there was a “degree of caution” on the high street due to inflationary pressures on the consumer.
“It is expected that Whitbread's ongoing group-wide efficiency programme can continue to offset a significant proportion of this inflation,” it said.
Whitbread raised its dividend per share by 5.6% to 101p.