Today’s half-year results report from hospitality firm Whitbread (LSE: WTB) is dominated by the proposed sale of its fast-growing coffee chain Costa to The Coca-Cola Company for £3.9bn.
I have mixed feelings about the deal. To me, Whitbread was an interesting investment proposition because of the potential of the Costa business. In April, I punched out an article explaining why I think Costa is the superior business within the Whitbread empire. Back then, it looked like activist investors were pushing for Whitbread to spin off the Costa brand as a standalone company, which I thought was a good idea because I would have loved to invest in an independent Costa.
Focused business
So, this deal with Coca-Cola is a bit of a curveball for me, but it looks like Whitbread has achieved a good price. I think the quality and standing of Coca-Cola as the purchaser speaks volumes about how attractive Costa is as a business.
Following the sale, Whitbread will operate its Premier Inn hotel chain, which also includes its restaurant brands such as Brewers Fayre, Beefeater and others. The report declares that the firm will become “a focused, fully integrated hotel business,” and it looks like there will be a decent war chest of cash to help the company with its ambitions to expand.
We won’t know for sure that the deal has gone through until next year because it is conditional on Coca-Cola obtaining two anti-trust regulatory approvals in the EU and China. If all goes well, Whitbread should get its £3.8bn net of costs in the first half of 2019, as the deal completes. The directors plan to return “a significant majority” of the cash to shareholders, “unless more value-creating opportunities arise and subject to prevailing market conditions.” They also plan to reduce the firm’s borrowings and pension fund deficit.
One of the lingering niggles I have about the hotel business is its inherent cyclicality. Call me old-fashioned, but I reckon cyclical firms should make their balance sheets as solid as possible when trading is good so that they can withstand difficult trading that’s bound to come along later. So, I’d rather see the company wipe out its borrowings and pension deficit completely before giving any money back to shareholders. I know that kind of ultra-conservative stance isn’t fashionable these days, but I worry that financially geared returns in the good times could turn into geared losses if the world economy takes a dive.
Structural growth opportunities
However, in the outlook statement, the directors insist Whitbread, in its new reduced form, has “significant” structural growth opportunities in the UK and internationally. The pace of growth is impressive. Next year, for example, Premier Inn expects to open 4,000 to 4,500 new rooms in the UK and Germany. But the company sounded a mild warning saying the recent economic and political environment, along with inflationary pressures causes “a degree of caution on demand,” which means “near-term profit growth may be lower than in previous years.”
Nevertheless, I see Whitbread as a tempting long-term buy-and-hold investment opportunity and believe its strategy of winning market share from “the declining independent hotel sector in the UK and Germany” will pay off for investors. I’d be a buyer of any weakness in the share price that might develop.
