What’s life after Costa going to be like for Whitbread? Shareholders cheerfully gave the nod to the £3.9 billion sale of the booming chain of high street cafés to Coca-Cola yesterday, rubbing their hands gleefully at the prospect of healthy pay day.
The sale leaves Whitbread the owner of about 785 Premier Inn budget hotels, plus 19 hotels it has acquired in Germany and restaurant brands, including roughly 140 Beefeater steak houses and 165 Brewers Fayre family pubs. Essentially, it’s now a much smaller company with pots of money to play with.
It’s going to be interesting for Alison Brittain, the former banker who as chief executive orchestrated the Costa Coffee sale (with a little help from Elliott Advisors and Sachem Head, the activist investors). She has the task of deciding what to do with the money she doesn’t dole out to shareholders. What’s she likely to do with it and should investors be taking their money and running?
It is worth noting that Elliott and Sachem Head remain substantial investors in Whitbread, with a combined stake of more than 8.5 per cent. Why would they cut and run while there is the chance a buyer may now come in for the hotels group?
The company was founded by Samuel Whitbread as a brewery in 1742. In 1974 it opened its first Beefeater restaurant and bought Costa in 1995. It sold the brewing business in 2000 but acquired Premier Inn and David Lloyd Leisure along the way.
So what will it do with all that money? Helpfully, Morgan Stanley, one of Whitbread’s house brokers, has given this some thought. Of the £3.9 billion that Coca-Cola is paying, it reckons £100 million will go in fees and costs, plus £350 million thrown into the pension pot and £250 million used to cut debts.
Assuming, as it does, that Ms Brittain uses £300 million to pay for the 19 hotels it bought in Germany, that leaves £2.9 billion that is heading towards shareholders, according to Morgan Stanley, which puts the payout at about £15.83 — more than six flat whites — a share. Thanks very much.
The exact figure may end up differently and it would also be no surprise if Ms Brittain found a few extra millions from the kitty to spend on small acquisitions in Germany, whose hotel market is more than a third larger than the UK’s.
And the value of the new Whitbread that Ms Brittain will be running? Morgan Stanley has offered a similar calculation, assuming the group’s debts of about £1.3 billion and pension obligations, then stripping out the Costa proceeds and cash return. The broker puts a putative value on Premier Inns and the restaurants of a little more than £5.5 billion, equating to an earnings multiple for the standalone shares of about nine times adjusted earnings — an attractive starting point.
Those who chose to stick with Whitbread after the Costa sale would therefore be holding pretty cheap shares relative to valuations elsewhere in the sector, in part because other operators, such as France’s Accor, have more substantial international operations.
Growth in Germany looks interesting and achievable, but depending on how quickly she wants to achieve it, Ms Brittain will need to do deals. Growing Premier Inn’s earnings in the UK will probably be tough over the next couple of years, at least until the economy starts to improve and the leisure and tourism industry is the other side of its Brexit-related uncertainties.
With the property portfolio on the books as of 2016 at a probably conservative estimate of up to £5.1 billion, there is a strong underpinning to the shares and they are worth owning.
ADVICE Hold
WHY The new business has a stronger balance sheet and good long-term growth options
Marston’s
Marston’s share price is ailing. The pub group and brewer’s stock has been plumbing seven-year lows in recent weeks as, despite assurances from the group, the City has fretted about trading, the sustainability of its debts and a dividend yielding a meaty 7.6 per cent.
The shares were off another 2¼p to 99p yesterday, on an update ahead of full-year results in November that was actually respectable, if a little short of analysts’ expectations.
Marston’s was founded in 1834 as a brewery in Burton-upon-Trent. As well as brewing ales including Pedigree, Brakspear and McEwan’s, it has an estate of 1,568 pubs, which it either owns and manages, franchises or leases.
It expects to improve pre-tax profits this year by about 4 per cent to roughly £104 million, despite its sales being buffeted first by the appalling late winter weather, which kept drinkers at home, and then by the sizzling summer sun and the World Cup, which put off diners at its premium sites, which include Pitcher and Piano outlets.
Like-for-like sales at the premium pubs, which account for about 45 per cent of revenues, were 1.2 per cent behind last year. This was offset by like-for-like sales growth in the drinks-led Taverns, worth about a quarter of annual turnover. Beer sales volumes, also about 25 per cent of revenues, were up by 47 per cent, helped out by acquisitions.
Marston’s, which also bought 15 former Mitchells & Butlers pubs yesterday, is exposed to the vagaries of consumer spending and sentiment, the weather and higher wage costs.
Its trading borders on the casual dining sector, which has been stricken by overcapacity, though its pubs tend to be in locations away from the high street and should be more resilient. As both a brewer and pubs operator it is also well diversified.
Put simply, Marston’s share price is confusing. The debt, at about £1.3 billion, is high, but most of it is long term with a fixed rate of interest. The dividend is twice covered by cashflows and the net value of Marston’s assets is 150p a share. Buy the shares, hold them, and wait for the City to change its mind.
ADVICE Buy
WHY Next year’s trading shouldn’t be as tough and the dividend feels safe
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