Whitbread calls time on pubs as £1.5bn estate goes on sale

Shares rise 9% as City welcomes leisure giant's decision to focus on hotels and restaurants
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When Whitbread, the Pizza Hut to Travel Inns group, unveiled its "radical" plan to sell its pubs unit yesterday, the almost unanimous reaction from the City was: "At last. What took them so long?"

When Whitbread, the Pizza Hut to Travel Inns group, unveiled its "radical" plan to sell its pubs unit yesterday, the almost unanimous reaction from the City was: "At last. What took them so long?"

Ever since the leisure company lost out last year to Hugh Osmond's Punch Taverns in the £2.75bn race to acquire Allied Domecq's pub estate, Whitbread's shares have been in freefall. Investors and analysts alike have despaired at the apparent lack of a strategic alternative to compensate for the Allied disappointment.

On Tuesday, the shares hit a year low of 412p. But yesterday's announcement that the board of Whitbread would seek to "unlock full shareholder value" from the 3,000 outlets in its pubs and bars division, propelled the unloved stock up almost 9 per cent to end the day at 469p.

So why did it take the management so long to put themselves, and their shareholders, out of their misery? It seems the answer is debatable.

Sir John Banham, the Kingfisher chairman and ex-CBI man who was drafted in to replace the affable Sir Michael Angus as chairman of Whitbread in July, claims the shift away from pubs and towards hotels, restaurants and fitness clubs "has been under way for 10 years". In contrast, David Thomas, the company's chief executive, says the decision to divest the pubs was only reached "in the last few weeks", following the completion of the £400m sale of the group's brewing division to Belgium's Interbrew.

One analyst suggests the strategy is a kneejerk reaction to recent moves by Whitbread's rivals. He said: "It's as if they looked at everybody else and thought - 'That looks like a good idea'." Whitbread's pubs portfolio, which includes the Dome brand, will come on the market at a time when Bass, which has also sold its £2.3bn beer unit to Interbrew, is disposing of about 900 underperforming units. Meanwhile, Scottish & Newcastle, the UK's second biggest brewer, is selling a further 700 outlets and Wolverhampton & Dudley Breweries is in talks to offload as many as 1,700 managed and tenanted houses.

Sir John argues that there is no danger of Whitbread's unwanted assets being undervalued, and claims the coincidental timing of the sales could even be a good thing. He says: "We are not putting our pubs on the market. We are putting a business on the market ... which is growing sales and profits. It would be very attractive to someone very big in pubs."

Mr Thomas says the list of parties who have expressed an interest runs "well into double figures". The most obvious frontrunners are Nomura, the Japanese bank - the country's second biggest landlord - and, ironically, Whitbread's former enemy Punch, now the UK's top-ranked pub operator. The sale, either of the whole division or as smaller packages, is expected to raise about £1.5bn. Of this, 75 per cent will be returned to shareholders directly or by way of a share buyback programme.

By 2001, the board expects the process to be "substantially complete". That will leave the group to focus on the newly dubbed "Future Whitbread", comprising Marriott hotels in the UK, Travel Inn, David Lloyd Leisure and the most successful of the company's restaurants brands. Struggling concepts such as Café Rouge, TGI Friday's and possibly Pizza Hut are expected to go the same way as the pubs, while Brewers Fayre and Beefeater are likely to remain in the streamlined portfolio.

Whitbread's stated intention, as outlined yesterday, is to generate faster earnings growth and increase shareholder returns by focusing on what it sees as the more dynamic end of the leisure market.

But while welcoming the group's exit from beer and pubs, analysts remain sceptical about its blueprint for future growth. Daniel Bunting, at Prudential Bache, said: "They are going to be getting right out of all their roots in pubs and brewing.... But they won't be getting away from the fact that the leisure sector in general is very capital intensive. The basic battle against dilapidation still applies."

There are two serious issues that could hinder Whitbread's planned renaissance. First, the group has flatly stated it does not intend to expand by buying established businesses, thus denying itself the opportunity of reaping easy synergies by swiftly building its critical mass. It has ruled itself out of the auction for Granada's Forte hotels division and implied it would not be interested in beefing up David Lloyd by buying a rival such as Cannons. Sir John says: "We are not in the business of paying for over-priced assets.... Every time someone puts something on the market, our share price falls because people think we are going to be foolish enough to fall for it. Well, dream on."

The second worry is that Whitbread is prevented from expanding its Marriott business abroad, as it does not own the brand outright. Far from seeing this as a problem, Mr Thomas says he intends to keep all of the company's expansion on home territory. "I don't want my people flying off to Abu Dhabi when there is a heck of a lot to do here."

Mr Thomas is so attached to his employees that he has decided not to change the company name, despite the new direction. "The name Whitbread means everything to [the staff] in terms of the values and heritage which it represents," he said. "It would be very disloyal to them to suddenly come up with a name I'd found in the dictionary."

It is this apparent indecisiveness and contradiction that has left analysts unconvinced about Whitbread's place in the changing leisure industry. One said: "Bass looks set to become a focused hotels operator, while Scottish & Newcastle will become a pure brewer. So where does that leave Whitbread?"