Derek Pain: Whitbread's plans for Costa Coffee make sale unlikely
No Pain, No Gain
Saturday 14 April 2012
The performance of Whitbread shares has been quite astonishing. Against a background of a reasonable but far-from-exciting trading statement, the price has hit a year's high and come close to topping the all-time peak of a little over 1,900p. As I write this the shares are around 1,850p against a 12-month low of 1,409p.
What is going on? As far as I can gather there are two stories circulating in the stock market. One, of course, involves a takeover strike for the budget hotels, coffee shops and pubs/restaurants group. The other relates to the booming Costa Coffee division. It is rumoured that the group is preparing to float (or perhaps even sell) the coffee shop business that has grown rapidly under John Derkach and now embraces more than 2,200 outlets.
The bid is expected to come from across the Atlantic. It is said a US company has completed its research and is near to launching a seemingly irresistible offer. Should a bid materialise – the alleged price is around 2,400p a share – it would capitalise the former brewer at more than £4.2bn. Its current valuation is nearer £3.3bn.
The Costa Coffee story was originally that a flotation was on the cards. But the sudden resignation of Mr Derkach as managing director has clouded the issue. He is taking over at Tragus, the unquoted, heavily indebted restaurant group that takes in the Café Rouge chain, itself once owned by Whitbread. His successor at the coffee counter is Chris Rogers, the Whitbread finance director. The group is now looking for a new head bean counter.
My guess is that a Costa Coffee sale is unlikely but a flotation, possibly with Whitbread shareholders getting special treatment, could be on the agenda, although the group has denied it has any present intention of getting out. The plan is to expand the business. Already Britain's top coffee shop chain, there are aggressive ambitions to extend the number of outlets worldwide to 3,500 by 2016.
Clearly the share strength is intriguing many investors. I feel that something rather more suggestive than current trading is behind the performance.
The group has experienced a profitable transformation in the past decade or so. Once a family controlled "big six" brewer, it had an extensive pub chain and moved, like many of its then rivals, into upmarket hotels, off-licences, soft drinks, wines and spirits as well as restaurants. The pub/restaurant chain is the main surviving element of the old brewing business. Yet Whitbread has continued as a quoted company, unlike all the other once-powerful brewers.
The No Pain, No Gain portfolio alighted on the shares nearly four years ago at 1,105p. It has been something of a bumpy ride, with the price at one time falling to 750p. But in the past few years, as the nation's economy deteriorated, the group's basic ability to resist recessionary influences has come to the rescue.
Booker, the cash and carry chain that remains the star of the portfolio, has produced final quarter figures that should keep shareholders happy although the immediate stock market reaction left much to be desired. In what is normally a low-key 12-week period sales rose 4.8 per cent. In the 52-week year (this year the group enjoys an extra week that should add £1m to operating profits) they were 7.3 per cent higher at £3.9bn.
The group, which now has £63m in the bank against £27m a year ago, intends to announce its results next month. The shares, strong recently, fell 3.25p on the trading update to 81.25p.
Two other constituents have contributed to the City's news flow. Northern Petroleum has, with its much bigger partners, started the search for oil in an area adjacent to the Zaedyus oil discovery off South America. It's a "low cost investment" for Northern, which has a 1.25 per cent interest in the venture.
TEG, the environmental composting group where the possibility of a takeover remains on the agenda, says it has generated electricity at its 50 per cent owned Glenfarg, Perthshire, plant and arranged a new contract with the recycling group Viridor for waste treatment.
Following a couple of approaches, TEG began a strategic review that could lead to a bid. Because of this process, it has postponed publishing its year's figures.
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