Whitbread – M&A fizz could add to Costa/Coke pop (MergerMarket.com
Whitbread’s [LON:WTB] half-year numbers, reported 23 October, were the first since it agreed to sell Costa Coffee to Coca-Cola [NYSE:KO] for GBP 3.9bn.
Presented on a continuing operations basis, it was investors’ first opportunity to look in detail at the future shape of the business now focused around the hotel chain Premier Inn.
Whitbread still trades at a low valuation relative to key peer Intercontinental Hotels [LON:IHG] , according to Flash analysis, so perhaps upcoming cash proceeds from Coke might prompt an opportunistic bid for the remaining Premier Inn assets.
Hotels owner-operator Whitbread trades at a price-to-earnings ratio of 11.6x after backing out cash expected to be received from the GBP 3.9bn sale. Intercontinental, its closest peer, according to a banker previously spoken to by this news service, trades at a PE ratio of 19.0x.
Whitbread’s market value is GBP 8.0bn but falls to GBP 4.1bn on the assumption that all cash is returned to shareholders. Management said following the deal it expects to return “a significant majority” of the Costa proceeds to shareholders. Some of the cash has been earmarked for Whitbread’s pension fund, though the vehicle already looks well-funded.
Premier Inn and Restaurants and Pubs, Whitbread’s remaining business, have GBP 4.2bn of tangible assets against net debt of GBP 881m and net defined benefit pension obligations of GBP 162m. Enterprise value ex-Costa proceeds is GBP 5.2bn for an EV/gross assets ratio of 1.3x.
Balance sheet figures may also underestimate the value of Whitbread’s assets and therefore overstate its valuation. Freehold property, which was carried at a book value of GBP 3.4bn at Whitbread’s 31 March year-end, has a market value in the region of GBP 4.1bn to GBP 5.1bn, according to comments by CEO Alison Brittain in a 31 August conference call.
Whitbread’s unadjusted EV/gross assets ratio of 1.2x compares to IHG’s 5.4x. Differing business models probably explain most of this: Whitbread is an owner-operator while IHG operates a franchise system. Even so, it seems fair to assume the Premier Inn brand would warrant some premium over book value in a buyout scenario.
Scenarios at Whitbread are of course wider than a third-party buyout. Management will update the market on Whitbread’s post-Costa capital structure, the future of its 727 pubs and restaurants which were barely mentioned at half-year results and possible M&A of its own.
Trading at a sizeable discount to IHG, and soon to receive half its market value in cash, it’s fair to assume property investors and rivals will be keeping a close eye on developments at Whitbread. Proceeds from the Costa deal are conditional on anti-trust approvals being received for the sale.