At Whitbread a Cup of Costa Coffee Can Cost 2 Billion Pounds

(Bloomberg Gadfly) -- Better late than never. Unless you are a shareholder in Whitbread Plc.

After prevaricating for more than two years, Chief Executive Officer Alison Brittain will explore a spin-off of the Costa coffee chain, according to the Sunday Times.

As I have argued since Brittain became CEO in December 2015, she should have done this right away. At that time the group's structure -- a hotels division and coffee arm with little overlap -- was her predecessor's problem. Now it is hers.

What's more, she is now on the backfoot, acting under pressure from two activist investors -- Elliott Advisors and Sachem Head, who together control about 10 percent of the shares. 

Brittain's dithering has had a real cost for investors.

Two years ago, Costa may have been worth 3.5 billion pounds ($4.9 billion) to 4 billion pounds, according to Simon French at Cenkos Securities. Now, the value would be closer to 2 to 2.5 billion pounds, he says. Since Brittain took over, Whitbread's market capitalization shrank by about 2 billion pounds through to the end of November -- though the arrival of activist investors has started to turn that around.

Even though she is leaving the door open to a break-up, Brittain is likely to resist an immediate split, according to the Sunday Times. Her strategy has been to continue to expand both sides of the business as well as cut costs. She also needs to kickstart sales at Costa Coffee, which have slowed.

The division is likely to have been hit by the arctic weather conditions in February and March, which hurt footfall. The company will report full-year earnings on Wednesday, although it may not update on current trading.

While the Sunday Times says the company will respond to Elliott's proposal alongside this report, the main point is that there's no reason for Brittain to wait any longer.

Elliott's proposal calls for a demerger of Costa, whereby a separate coffee company is created, and shares distributed to existing Whitbread holders. As no asset would be changing hands, any upside from a revival in the chain's performance would simply accrue to Whitbread investors who chose to hang onto their shares.

We could be at the nadir for the British consumer, and any newfound spending power should give Costa and the Premier Inn hotel chain a lift. So there is less scope for Brittain to argue that the time is not right for a split.

Brittain is also attempting to build a business in China. That is likely to take time, and the need to reach critical mass here shouldn't be used as an argument to delay a separation either. Even if she pressed the button on a demerger immediately, it would take around four to six months to execute the plans. So any more delay, say, to launch a review, would be yet more wasted opportunity for shareholders.

Brittain has already waited too long to take necessary action. She shouldn't let the coffee get any colder.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

©2018 Bloomberg L.P.

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