Whitbread's Habit of Delaying Is Tough to Break Costa Premier Inn

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(Bloomberg Gadfly) -- A coffee habit can be hard to break. So can a leisurely approach to confronting problems with the company you run.

After two years of resistance, Alison Brittain, Chief Executive Officer of Whitbread Plc, has agreed to demerge Costa Coffee. The announcement comes less than two weeks after Elliott Advisors said it had built an interest in the group, and presented management with plans for a split. 

While Brittain’s capitulation to Elliott's demands has been swift, the time she plans to take to execute the spin-off looks unhurried. Investors may yet again bear the cost.

Although Whitbread will demerge Costa "as fast as practical and appropriate," it is targeting a separation by April 2020. That long road to completion risks becoming another flashpoint with Elliott and Sachem Head, which together have an interest of about 10 percent.

True, Brittain needs time to address the group's pension deficit, which is now about 300 million pounds ($418.9 million) – this includes figuring out how to apportion it between Costa and Premier Inn, which will remain under Whitbread ownership. All of the group's borrowings are also at Whitbread, so that needs to be tackled, too.

But time to enable an IT upgrade to be completed, and generate extra cost savings -- the group has increased its annual efficiency target from 150 pounds to 250 pounds -- looks unnecessary.

So does allowing time for Brittain to further develop the international arms of both Costa and Premier Inn. Overseas expansion by U.K. retail businesses is notoriously difficult and time-consuming, so this shouldn't be used an excuse to put off the necessary demerger. 

This may be a case of the CEO wanting to underpromise and overdeliver. And there’s some sense in leaving some wiggle room to surprise investors with a quicker-than-expected separation -- perhaps making up for the delay from the first rumblings about a break-up to Wednesday’s announcement.

But all this footdragging may impinge the amount that ultimately gets realized, once again frustrating investors. The longer Whitbread takes to achieve the benefits of a split, the longer the coffee chain’s performance has to drift. The lengthy timetable may be a tactic to facilitate a sale of Costa before the demerger -- handing the company 2-2.5 billion pounds to invest rather than releasing value to shareholders.

Though shares are up about 14 percent since the beginning of April, to just over 41 pounds, their 1.4 percent drop on Wednesday reflects continued poor performance at Costa. 

As I've argued, even with the recent gains, you don't have to be wildly optimistic to believe that a split will create value. With the greater visibility of Costa and Premier Inn once both are separately listed, the odds on each becoming a takeover target shorten, and so the benefit to shareholders could be even greater.

It is also possible this isn't the end of the activist push. Attention could now turn to releasing value from Premier Inn's property estate, which looks a natural target for a rival hotel looking to expand.

This wasn't part of Elliott’s or Sachem Head’s demands, but given that Brittain has acquiesced to the break-up, there’s nothing to stop other funds from pushing for further changes.

Selling off Premier's property is riskier, particularly given the division’s pension and borrowing commitments, and easier for Brittain to resist than the relatively straightforward demerger.

Brittain could yet prove her doubters wrong if she does a good job with the Costa demerger – and that includes a speedy execution. But her unwise delaying tactics risk becoming another storm in a coffee cup.

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

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