Whitbread plc (LON:WTB) has promised to shell out a "significant amount" of the proceeds from its sale of Costa Coffee to The Coca-Cola Co (NYSE:KO) to shareholders but is yet to determine how much to pay.
The group said in its first half results on Tuesday that the amount will be determined following discussions with shareholders, pension fund and debt providers.
READ: Whitbread warns on profits as it invests in Premier Inn expansion after Costa disposal
Analysts at Liberum said: “The sale of Costa should complete in the frist half of 2019 generating net cash proceeds of £3.8bn, which after paying down debt (estimated at circa £900mln at year end) and topping up pension deficit (£158mln) should leave circa £2.6bn surplus to allocated between shareholders and acquisitions.”
Whitbread expands Premier Inn chain
Some of the proceeds of the Costa disposal are also being used to help fund Whitbread's expansion plan for its Premier Inn hotels business. The plan is to open 4,000-4,500 rooms in the UK and Germany in 2019.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “The real growth opportunity lies in Germany, where the hotel market is 35% larger than the UK, but the branded budget hotel segment only accounts for 6% of the industry, compared to 24% here in the UK. Little wonder then that Whitbread is looking to open 33 hotels across 15 German cities by 2021.”
Liberum, which maintained a ‘hold’ rating and target price of 4,450p on Whitbread, said the fundamentals of the German market "are attractive" but the "complexity of property ownership structures has hampered the pace of roll-out with still only one hotel open and trading and incremental leases slow to negotiate".
"Hence, we believe there is a prospect that Whitbread could prioritise acquisitions at significant ‘strategic’ premiums to gain critical mass," it said.
Whitbread takes on Airbnb with no-frills alternative to Premier Inn
Whitbread will also open a low-cost alternative to Premier Inn, called Zip, in Cardiff in March 2019.
The cost of rooms per night will start from £19, compared to £49 at Premier Inn.
Zip rooms will be smaller and customers will have to pay extra for services such as breakfast and room cleaning. To keep costs down, hotels will be located on the outskirts of major cities.
The decision to launch Zip comes as Airbnb continues to disrupt the accommodation sector.
Airbnb, which allows homeowners to rent out their house, flat or room/s, has grown in popularity as it offers cheaper rates than most hotels and providers more accommodation options in high-demand tourist destinations.
Whitbread admits that it has seen consumer demand wane recently at its Premier Inn hotels in the UK, leading to a 0.9% decline in revenue per room and broadly flat like-for-like sales growth in the first half.
Investor sentiment remains positive on Whitbread, says analyst
The company is now predominately a hotel business after the sale of Costa and it faces pressure from investors to prove that it can deliver growth without the coffee chain.
“Nonetheless, the separation of the business has long been called for by investors and the sale of Costa has helped the share price rise by 13% over the last three months,” said Richard Hunter, head of markets at Interactive Investor.
“The performance is the same over the last year, as compared to a 6.4% decline for the wider FTSE100, and although the company is in the throes of an important strategic change, sentiment remains positive, with the market consensus of the shares coming in at a cautious buy.”