Buoyed by the agreement to sell Costa Coffee to Coca-Cola for £3.9bn, Whitbread’s (LSE: WTB) share price has topped out above 4,700p for the first time since 2015. The shares are up by nearly 20% over the past month — but could they be about to climb even higher?
No sooner has Whitbread agreed a sale for Costa than attention shifted to what may happen to the group’s other businesses. There’s speculation that the other arm, Premier Inn, could find itself a viable acquisition target by a larger hotel chain. Interested parties in the budget-priced hotel chain include global hoteliers, such as Intercontintal, Accor and Marriott, as well as private equity groups.
But even if a bid does not materialise, there are alternative ways to unlock value from the Premier Inn business. Some analysts reckon there is a potential asset management opportunity from the sale and leaseback of some of its freehold properties, which could raise up to £4bn in cash. Others suggest another way to become more ‘asset-light’ would be for Premier Inn to make the transition to a franchise model — such a move would also reduce the volatility of earnings.
After Costa’s sale is completed, improving returns at Premier Inn would become Whitbread’s main priority, but there’s no consensus among analysts over the best course of action. And with negative like-for-like sales growth in the UK, there’s growing concern over the impact of Brexit uncertainty and oversaturation on the business.
Whitbread is looking to push forward Premier Inn’s expansion into Germany to offset the slack in the UK, but with an untested brand and strategy, future growth is far from assured. With this in mind, I reckon the group still faces sizeable execution risks over the medium term.
Meanwhile, bookmaker William Hill (LSE: WMH) is going on an expansion spree in a bid to build up its US presence. On Wednesday, the company announced that it has agreed a new partnership with American casino group Eldorado Resorts to provide digital and land-based sports betting services.
It’s the third such deal for the company across the Atlantic, which follows a recent US Supreme court ruling to legalise sports betting in the country. The US, with a population that is nearly five times greater than the UK, is potentially a massive growth opportunity for William Hill.
This opportunity also comes at a convenient time, given that the UK government is set to drastically reduce the amount which can be wagered on the gaming industry’s lucrative fixed-odds betting terminals. But of course, William Hill is not the only company looking to grab a slice of the action in the US. In recent months, Paddy Power Betfair and GVC Holdings have also entered into similar deals with their US partners.
Still, it’s not as if the market has priced-in much of this international opportunity to its share price. Valuations are undemanding, with William Hill valued at just 12.2 times its expected earnings this year. Prospective investors can also find a good yield here — 5.2% at the time of writing.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended GVC Holdings, InterContinental Hotels Group, and Paddy Power Betfair. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.