Photo: Marco Verch

Costa Coffee is to demerge from Whitbread and become a separate listed entity under plans announced in the hospitality firm’s annual results. The move will provide shareholders with two distinct businesses, with Whitbread maintaining ownership of the Premier Inn hotel brand and restaurant brands such as Brewers Fayre and Beefeater.

Announcing a 24-month timeframe for the demerger to “complete critical and complex transformation and infrastructure objectives,” Whitbread Chief Executive, Allison Brittain, said both businesses would be better able to take advantage of structural growth opportunities in the UK and internationally.

“The board, therefore, believes that it is in the best long-term interests of Whitbread's many stakeholders to separate Premier Inn and Costa, via a demerger of Costa... We have carefully considered the optimal timing and concluded that it will be pursued as fast as practical and appropriate to optimise value for Whitbread’s shareholders,” she said in a press statement.

“Costa will also be well positioned to build further on its strong international foundations with growth expected in China and Costa Express,” she added.

Whitbread reported sales up 6.1% to £3,295m in its 2018 full financial year. Profit before tax was up 6.4% to £548m.

Although Brittain acknowledged the demerger idea had “been around for years,” rumours of a Costa break-away had intensified in recent months after slower-than-expected quarterly growth prompted some analysts to speculate a split was imminent.

Talk of the demerger intensified in the run up to Whitbread's latest results after reports that US hedge fund Elliott Advisors, which has built a stake in Whitbread of more than 6%, was applying pressure for a break-up. The activist investor group, known for taking aggressive positions in listed companies, is reported to believe the move could create as much as £3bn in value.

Fellow activist investor, Sachem Head, which has built a 3.4% stake in the company, had also called for a split between the two brands, with Brittain, indicating earlier this week that that she was not “philosophically opposed” to a Costa spin-off.

Highlighting the importance of Costa’s Chinese business, Brittain also announced the completion of the buyout of one of its two local JV partners in the south of the country. Costa’s growth in China has remained robust, despite a slowing of sales across its UK operations.

“This acquisition provides Costa with full control of stores outside Beijing and allows us to increase our ambition to target 1,200 stores by 2022. These acquisitions provide solid foundations from which both businesses can grow international operations of increasing significance in the years ahead,” she said.

Commenting on the news, Allegra founder and CEO, Jeffrey Young, said the spinoff could be highly beneficial, allowing Costa to focus on its own business and increase sector competition.

“The move isn’t a surprise, rumours have been circling for around two years and this has been months in the making. Now management have found the right time I expect it will be good for both businesses so they can focus on developing in international markets and maximising shareholder returns," he said.