Whitbread: purple strain
In the wake of Covid-19, resilience has supplanted earnings growth as the main investment premise
How we long for the normal unpredictability of life before coronavirus. Bosses, bankers and financial scribblers could plausibly pretend they knew what was happening. Covid-19 has dispelled that illusion, as a £1bn rights issue from Whitbread shows. Resilience has supplanted earnings growth as the main investment premise.
The purple-liveried UK budget hotel chain is raising cash equivalent to one-quarter of its undisturbed market worth on this precautionary basis. The money may be needed to tide it over the coronavirus-induced closures. Or it could help Whitbread seize opportunities created by the collapse of weaker competitors.
In a UK rights issue, shareholders face an unwelcome choice. They can either stump up to maintain their proportionate stake, or sell rights to new stock and risk subsequent earnings dilution. Whitbread has an enviable £2.4bn in largely undrawn credit facilities. Why not use that instead?
Because the company will become scarily leveraged anyway. The numerator — lease-adjusted net debt of £1.8bn — should not change. But the denominator of ebitda has collapsed. It stood at £680m in the year to February. Whitbread’s half-year net cash outflow could be more than £600m. Pencil in a possible hit of £300m in the second half, assuming travel is slow to restart. The bulk of the capital raise will then be needed.
Whitbread’s £950m revolving credit facility is only available normally if it sticks to conventional leverage limits of about 3.5 times. Lenders have waived that, but on condition net debt stays below £2bn. For many companies, the dry powder of undrawn facilities will look equally damp on closer inspection.
The leverage covenants that usually apply to mature businesses become useless during an earnings collapse. A narrowly profitable company could have net debt to ebitda measured in meaningless thousands. Analysts are either providing finger-in-the-air estimates for Whitbread, or wisely reserving judgment.
A plan to reopen UK hotels between July and September looks reasonable given budget airlines may start flying again next month. There is some reassurance in the record of chief executive Alison Brittain. She sold the Costa café chain to Coca-Cola for a knockout price, returning £2.5bn to shareholders.
A belt-and-braces financing makes sense when initial predictions about the outbreak — Lex’s included — were so wide of the mark. The effect of coronavirus is, to paraphrase William Burroughs: “Nothing is true. Everything is possible.”