Back in the day, the last business day of the month was always a rather important moment for me because it would determine whether I was a hero or a zero in the institutional investor world I used to belong to. Believe me, in the emails and related that followed, the whole investment firm would know whether your Fund had done well or badly. Of course the way to build performance was one month at a time, so a 'good close' to the month was immensely useful. If I was still in that world - and invested akin to my thoughts today - then I would have had a big beaming smile on my face on Friday, thanks to the news update from my old mucker Whitbread (WTB) whose shares I have been continuously loving up (most recently HERE)…
My rationale for holding Whitbread shares has been centred on the observation that it had two great brands that resonated with consumers on-the-ground (Premier Inn and Costa Coffee) and maintained a good balance sheet. This differentiated it from many other UK-listed consumer stocks. Speculatively, I had hoped the company might break up and certainly viewed the appointment of Adam Crozier as Chairman as a good and positive move in this regard. The announcement earlier this year around an anticipated Costa spin-out has now been trumped by the news that soda behemoth Coca-Cola (KO in the US) is looking to buy the coffee shop brand for £3.9 billion or x16s this year's ebitda.
It needs the growth as soda continues to look increasingly ex-growth strategically plus there will be distribution and related synergies to gain. Coca-Cola will also be getting even closer to consumers. I am not surprised the Whitbread board has unanimously accepted this bid rather than go through the potentially messy and expensive individual spin-off. The price is more than fair (Costa is about 25% of Whitbread's profits currently and this price is equivalent to about 50% of Whitbread's EV) and it gives a very reasonable chunk of change to apply to the Premier Inn growth capex as well as a capability to return a lot of cash to shareholders.
So what to do assuming you have a few shares? I never try to dissuade anyone from taking profits following a decent share price bump...but my view of the Whitbread sum-of-the-parts was that it was worth £50 a share (which was why I have been so excited at / around the £40 a share level the shares have been at recently). Plugging in Coca-Cola's pleasant offer and valuing Premier Inn as a sensible growth hotels business, I still get this as the price the share should trade to....assuming of course Premier Inn itself does not get bid for. Time for a celebratory coffee...at a Costa shop, naturally.
Filed under: Whitbread, Costa Coffee, Frontera, Footasylum, Bluebird, Dechra Pharma, David Scott
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