(Bloomberg) -- Whitbread Plc is betting that its faster-growing Costa Coffee chain will compete more effectively against the likes of Starbucks Corp. once separated from the company’s hotel business.
Costa will be spun off from Premier Inn within 24 months, the Dunstable, England-based company said Wednesday. The planned split follows mounting pressure from activist investors who said the two businesses sit uneasily together under one corporate roof.
“Coffee shops and hotel rooms don’t make natural bedfellows,” Hargreaves Lansdown analyst Laith Khalaf said by email. “The breakup will provide each of the two emerging companies with greater strategic focus on their own goals.”
Costa has spread across the U.K., where it’s a fixture of downtown shopping districts and train stations. But its shops face growing competition from Starbucks and sandwich-focused Pret A Manger Ltd. and Greggs Plc, and growth has been slowing.
Investors believed Whitbread’s attachment to Premier Inn was restricting further expansion domestically and in China. Activist investors Elliott Management Corp. and Sachem Head Capital Management LP have been pushing the company for a breakup. Whitbread’s Costa business could be valued at 2.39 billion pounds ($3.3 billion), according to analyst estimates.
A representative for Sachem Head wasn’t immediately available for comment. Elliott said it was pleased that Whitbread planned a split and urged the company to move quickly.
“In Elliott’s view this should be achieved within six months,” the fund said in a statement.
The two-year timeline appears lengthy compared with other U.K. breakups in recent years. When Cookson Group Plc spun off Alent Plc in 2012, for example, it took just seven weeks from the time the plan was announced to completion. One the longest recent demergers in the country involved Carphone Warehouse Group Plc, which broke out TalkTalk Telecom Group Plc as a separate business in 2009 in just over 11 months.
Costa said in a statement that its 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 optimized for shareholders over the longer term.” The interventions by the activist investors expedited the company’s announcement, Chief Executive Officer Alison Brittain said on a call.
“The activists’ strategy has been remarkably successful,” Bernstein analyst Richard Clarke said by phone. “The plan is not out of kilter with what management has been saying, but this does feel like a bit of a capitulation.”
Costa is the U.K.’s largest coffee chain, with a market share of 39 percent, according to researcher Allegra. It leads Starbucks, with a 25 percent share, and Caffe Nero, with 11 percent.
As coffee shops proliferate across the U.K., Costa has found growth harder to come by in a maturing market. Greggs and pub operator JD Wetherspoon Plc have both started selling flat whites and cappuccinos for less than Costa.
Under Brittain, Costa has also focused on China, where Whitbread plans to more than double its stores to 1,200 by 2022. Premier Inn, meanwhile, has expanded into Germany and the separation of the arms will boost their international prospects, the CEO said.
The planned spinoff comes as competition among the world’s biggest coffee companies heats up, with Nestle SA acquiring Blue Bottle Coffee Inc. and JAB Holding Co. snapping up companies like Keurig Green Mountain and Peet’s Coffee.
“Costa takeover speculation will likely only grow from here,” Morgan Stanley analyst Jamie Rollo said in a note.
Any potential suitors for Costa may be disappointed by the chain’s current performance. Amid dwindling foot traffic on the U.K.’s shopping streets, Costa reported that its domestic like-for-like sales fell by 0.4 percent last year, after growth of 2 percent a year earlier.
Whitbread’s shares were down 0.1 percent at 12:50 p.m. in London, after initially rising as much as 3.7 percent.
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