Don’t expect Alison Brittain to sit back and enjoy the plaudits just because the ink has dried on the £2.5 billion cheque that the boss of Whitbread has written to shareholders.
Whitbread investors were yesterday celebrating the completion of a multibillion-pound tender offer for the hotel group’s equity after last year’s disposal of the Costa Coffee chain for £3.9 billion. However, plenty of pressures remain for the Premier Inn owner and its highly regarded chief executive. The attentions of the leisure group’s investors move swiftly to the success, or otherwise, of the group’s next phase.
Whitbread was founded as a brewery in 1742, a British operation that it owned until 2000. During the course of its history the company acquired and later auctioned off a wide array of assets, including David Lloyd Leisure gyms and Marriott Hotels, as well as the TGI Fridays and Pizza Hut restaurants. Its most recent metamorphosis came last year when, after a couple of gentle shoves from activist investors at Elliott Advisors and Sachem Head, it sold its high-performing Costa Coffee high street outlets to Coca-Cola for a price tag that was seen at the time as princely.
As it stands Whitbread is left with Premier Inn hotels, some 804 of which are in the UK and 19 in Germany, with a further eight operated in the Middle East through a partnership deal with Emirates, the Dubai-based airlines owner.
It also has 160 Brewers Fayre and 165 Beefeater restaurants, almost all of which are located inside Premier Inns, along with several other smaller brands, including 80 Table Table pub restaurants.
Strategy
The strategy that has been adopted by Ms Brittain, 54, a former divisional chief at Lloyds Banking Group, has been clear: to be the leading budget hotel operator in Britain and Germany. She spent an estimated £300 million buying 19 hotels in Germany, only two of which are up and running, and plans to double that to get to 38 hotels with about 7,100 rooms.
Germany was chosen for Whitbread’s international expansion after it studied the size and dynamics of the country’s population and the behaviour of its travelling business community. It also found that there was no incumbent budget hotel operator to have to compete with.
This strategy is all very well in principle, of course, but in practice it is anything but. The pressures on the UK business are there for all to see. The leisure industry in Britain is not only fiercely competitive, it is also battling with uncertainties over tourism and the macroeconomic effects of Brexit, hard, soft or otherwise, on consumer confidence and spending power.
Demand
At its annual results in April Whitbread said that demand in Britain had been weakening over the past year, particularly in the regions, and although total sales rose over the 12 months, its revenue per available room — a key metric for hotel operators — fell by 1.9 per cent.
That trend deepened during its first quarter of this year and Whitbread said in a trading update last month that like-for-like sales fell by 3.7 per cent between March and May, made up of a 4.6 per cent fall in accommodation sales and a 2.1 per cent drop in underlying takings from food and drink at the restaurants over the period.
More recently, figures tracked by Morgan Stanley, the group’s broker, found that revenue per available room in the UK rebounded strongly in June after weakness during the previous five months but a persistent regional decline held back a healthy recovery in London. In short, the pressure’s still on.
Germany
The situation in Germany, given that the business is still in its infancy, is more nuanced.
The group said last month that its drive into Europe’s largest economy remained on track, with occupancy levels at its first hotel in Frankfurt running at 70 per cent and its second outlet in Hamburg beating expectations, but the truth is that investors won’t get a proper insight into how the operation is going until the end of the financial year in February at the earliest, by which time a realistic number of assessable hotels will be open. The economic backdrop doesn’t augur too well. Germany’s GDP grew by 0.4 per cent during the first quarter and is expected to have declined slightly over the second three months, and the government is hoping for overall growth this year of only 0.5 per cent.
While theoretically the budget end of the hotel market should be more resilient in times of economic strife, in practice Whitbread’s model in Germany might be flush with opportunity but it remains untried. In the background, for Ms Brittain — and for investors — there are other worries.
Short sellers
Filings to the regulator, the Financial Conduct Authority, show that funds that specialise in betting against company shares are beginning to move in. Jane Street Global Trading, a Manhattan-based firm, and Blackrock, the American-owned fund manager, have taken “short” positions against Whitbread’s price. These are small but reports suggest that other funds are beginning to see Whitbread as a target for investment bears.
At the same time Elliott has trimmed its stake in Whitbread to below 5 per cent and is said to be keen for the group to sell or lease parts of its wholly owned property portfolio.
On their own neither of these things is likely to rattle Ms Brittain, but it is clearly preferable to have your biggest investors onside and as many in the City as possible believing that your price is set to rise.
Unsurprisingly, perhaps, and with plenty of movement in between, Whitbread’s shares are almost exactly where they were at the end of last year. Down 142p, or 3 per cent to £45.43 yesterday, they trade for about 18 times Shore Capital’s forecast earnings for a yield of about 2.1 per cent. This rather rich valuation is underpinned by a property portfolio worth as much as £5.8 billion and the anticipation that at some point a private equity buyer could come knocking.
Nevertheless, while those that followed this column’s suggestion of holding the shares in October should stick with it, otherwise they are probably best avoided.
ADVICE Avoid
WHY Long-term possibilities look attractive, but there are too many pressures on trading in the nearer term
