Slicing Up Whitbread- Costa Coffee Demerger Targeted For 2020

That was quick. Whitbread’s (WTBCF) CEO Allison Brittain caved to activist pressure in seemingly record time, announcing the spinoff of Costa Coffee less than two weeks after Elliott Advisors unveiled a ~6% stake in the company. Of course, Whitbread doesn’t believe it caved and in the press release announcing the demerger (British for spinoff), the company notes that it ‘regularly reviews’ its portfolio and the demerger proposal was actually their idea:

The 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. Given the significant strategic progress that has been made and the momentum in the delivery of the plan, the Board is 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. 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. Announcing the demerger of Costa will provide clarity to shareholders, team members and other stakeholders on Whitbread’s strategic direction.

The catch is that the spinoff won’t take place until…2020. Yes, you read that right, two years from now. The company provided a number of reasons for the long breakup period including complicated underfunded pension obligations which will need to be allocated to the various companies. Additionally, the company will need to work out the proper capital structures and setting up the debt facilities will take some time as well. Both critical to a proper separation. The other part of the story is that Whitbread wants more time to execute on its current strategies, both in terms of growth (ex. international expansion) and cost efficiency (ex. new IT systems).

Not surprisingly, Elliott isn’t pleased and believes the demerger should be done in about five months or so. Andrea Felsted at Bloomberg’s Gadfly agrees, but floats the idea that the proposed timeline could be a case of ‘underpromise and overdeliver’ by Ms. Brittain. In any case, she believes the delay could reduce the value received by shareholders. Apparently, every day Whitbread owns Costa leads to potential ‘drift’ and the possibility of an acquirer coming in and paying cash for the business. The latter scenario isn’t always such a bad ending for shareholders though and in fact, takeovers of announced spinoffs are actually quite common in the US. They often occur at quite sizable multiples as well. Ms. Felsted pushes the Whitbread breakup idea even further, suggesting that Whitbread’s remaining Premier Inn business could soon come under activist attack as well because apparently, there is value to be released in Premier Inn’s property estate as well. Perhaps these further attacks are one reason management is delaying the process – working on one spin is difficult enough, so why complicate things with two?

While we don’t officially track this data, my feel from following spinoffs over the years is that two years is a bit on the long side, especially considering the fact Premier and Costa are already separate entities with their own management teams. A year is probably the most common initial timeframe and most spins seem to fall within +/- 6 months of that. Are there some exceptions? Sure, DowDuPont or whatever it’s called today comes to mind. To be fair, spinoff transactions are complicated and there is a lot going on behind the scenes that investors don’t really know all the behind the scenes ins and outs.

On the other hand, and this is pure speculation, the long process might be Ms. Brittain trying out a new anti-activist tactic: The Stall. Why bother? It gives the appearance of listening to activists and pursuing shareholder value, but also leaves plenty of time for things to maybe change down the line. Simply put, a lot can happen in two years. Just think about the political landscape in the US two years ago. Here is a quick list of things that popped into my head:

  1. Market conditions change making a breakup less desirable
  2. The so-called breakup premium can vanish
  3. Annoying ‘long term’ investors might exit the stock…for a variety of reasons
  4. Acquirers could appear making it moot
  5. and so on and so forth…

It should be fun to see how this plays out over the next few months and potentially two years.

Disclosure: Author holds no position in any stock mentioned.

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