Elliott Advisors is hoping to give Whitbread a quick caffeine boost. The activist hedge fund is pushing for an independent listing of the UK group’s Costa coffee chain, a move that could unlock up to 3 billion pounds of value. It’s a simple-seeming solution to the hotel group’s tired share price. But separating the two bits of the business does have merit.

Elliott on Saturday night revealed that it has a 6 percent economic interest in Whitbread, making it the group’s largest shareholder. Throw in New York-based Sachem Head, which owns a 3.4 percent stake according to Eikon data, and close to a tenth of the company’s share capital is in now in the hands of activists.

Shareholder dislike of Whitbread’s hotel-coffee combo is reflected in its bargain valuation. Even after a near 8 percent jump in its share price on Monday morning, the owner of the Premier Inn budget hotel chain’s debt and equity is worth 10 times expected EBITDA for the year to next March. Rival hotel group InterContinental trades on a 14 times multiple, as does competing coffee purveyor Starbucks. Slowing UK consumer spending is a concern. But the two parts of the business have few synergies – fewer than 100 of the 42,000 employees at Costa and Premier Inn work across both brands.

A freestanding Premier Inn business would be worth 8.5 billion pounds on a 13 times EBITDA multiple – roughly equivalent to Whitbread’s current enterprise value. That suggests investors are assigning little or no value to Costa’s 2,400 UK outlets. Take the 265 million pounds of EBITDA that Morgan Stanley analysts reckon the chain will churn out in 2019, put it on a conservative 11 times multiple, and the division could be worth up to 3 billion pounds if set free from its parent.

Costa’s separate legal structure and management team makes a spinoff relatively straightforward. The rejig should cost no more than 15 million pounds to 20 million pounds in one-off fees. It would also help Whitbread CEO Alison Brittain avoid more drastic options such as a sale of its portfolio of hotel properties. A caffeine fix usually delivers just a short-term boost. In this case, though, it’s worth a try.

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CONTEXT NEWS

- Elliott Advisors holds an economic interest of more than 6 percent in British hotel and coffee-shop operator Whitbread, the activist fund said in a statement on April 14.

- Close to 10 percent of Whitbread’s share capital is now held by activist investors, with Sachem Head holding 3.4 percent, according to Eikon data.

- Whitbread shares were up 6.7 percent to 41.99 pounds by 0750 GMT on April 16.

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(Editing by Peter Thal Larsen and Bob Cervi)

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