Whitbread sale of Costa begs the question of who will be next on the activists’ hit-list?

Writer, Russ Mould
Friday, August 31, 2018 - 14:30

“Today’s huge leap in Whitbread’s shares following the sale of Costa Coffee, breaking up the group far more quickly than expected and for a higher price than analysts had expected, must be seen as a vindication of activist investors that the FTSE 100 firm’s unwieldy structure meant that there was hidden value waiting to be unlocked,” says Russ Mould, AJ Bell Investment Director.

“Coming so soon after BHP Billiton’s decision to sell its US onshore shale assets (after pressure from Elliott) and John Menzies’ disposal of its newspaper distribution business (after stake building by Germany’s Shareholder Value Management and Switzerland’s Lakestreet), this raises the question of which British firms may be next to find an activist investor as a shareholder.

“Activist funds Sachem Head and Elliott had both taken stakes in Whitbread in the view that the group’s share price undervalued the Premier Inns-to-pubs-to-Costa Coffee chain relative to the sum of its parts.

“In April, new chairman Adam Crozier and chief executive Alison Brittain decided the time was right to break up the company by announcing a plan to demerge Costa Coffee by 2020.

“Today’s announcement of the sale of Costa to Coca-Cola for £3.9 billion in cash offers a much speedier resolution and – best of all for shareholders – the price tag exceeds anything expected by analysts.

“It equates to around 16.5 times last year’s EBITDA (earnings before interest depreciation amortisation and tax) compared to the 15 times historic EBITDA multiple on which Starbuck’s currently trades and the 15 times multiples paid by JAB when it acquired Pret A Manger for £1.5 billion earlier this year.

“Analysts had been valuing Costa at around 12 times EBITDA or £15.50 per share.

“The £3.9 billion sale price equates to £21.25 a share and that 575p-per-share uplift explains why the shares are up so much, especially as Whitbread clearly intends to return a chunk of the cash proceeds directly to shareholders.

“That means Whitbread investors will be happy, including Sachem Head and Elliott and this may raise the question of where they start to look next for hidden value.

Barclays, Micro Focus, Hammerson, Smith & Nephew and Premier Foods already have activists on their share register, as does De La Rue, where the London-listed Crystal Amber investment trust appears to be taking an increasingly aggressive line as it agitates for change and improved operational and share price performance.

“Firms where share price performance has been weak, operational performance sub-optimal relative to peers or the business structure is complex could come under greater scrutiny.

“Possible candidates may include shopping centres owner INTU, whose share price continues to drop like a rock, Pets At Home, Petrofac and any number of struggling retailers, including perhaps Kingfisher, where boss Veronique Laury’s One Kingfisher plan is still yet to really make its mark (at least on the share price) half-way into the five-year project. Besides INTU, the Real Estate Investment Trust sector also looks ripe for consolidation.”

What are activist investors and what do they do

There are generally four types of investors:

  • Passive investors, who simply sell the shares if they see something they do not like
  • Stewards, who actively engage with management to ensure that the interests of the board, stakeholders and shareholders are aligned
  • Activists, who take matters into their own hands and become directly involved in shaping a company’s strategy. In some cases, they will even seek representation on the board, especially if they feel their views are being ignored.

Activist investors’ approaches to companies are geared to improving share price performance and total returns to investors and they generally have one of (or all of) four key thrusts: a change of strategy and corporate structure; a more efficient capital structure; improved operational performance; and better corporate governance.

  • In the case of a strategic overhaul, activists will tend to press for asset disposals or spin-offs to recognise value, the complete break-up of a company or even seek to put it in play so a bidder will emerge for the whole entity. Barclays is already shrinking itself back to health, after the sale of its African arm, but the underperforming investment bank, which comes with hefty capital requirements from a regulatory perspective, could come under the microscope.
  • Classic activist tactics when it comes to capital allocation include pressing for increased dividends, special dividends and share buybacks. Barclays is already targeting an increase in its ordinary dividend from 3.0p to 6.5p in 2016, although its yield is still some way below that of HSBC and Lloyds, while the latter is now also running a buyback programme.
  • Operational alterations sought by activists often include a change of management, the sales and leaseback of assets or the closure or restructuring of units that are performing poorly. This again may mean Barclays’ investment bank comes under scrutiny while the board will be following the US legal case, the SFO investigation and the conclusions of the whistle-blowing inquiry should they do any damage to the leave the reputation of the bank or any particular individuals.
  • Finally, activists will look at corporate governance. They will look toward the balance between executive and non-executive directors and assess whether the mix is right and whether they have the right skill sets. There could also be calls for executive pay to be reined in, should the activist shareholder consider it excessive, and for greater focus on how the interests of managers are investors are to be better aligned. If an activist feels its calls for change are being ignored or not given enough attention then it may seek board representation and get its people onto the board in an executive or non-executive capacity.

These articles are for information purposes only and are not a personal recommendation or advice.

russmould's picture
Written by:
Russ Mould

Russ Mould has 28 years' experience of the capital markets. He started at Scottish Equitable in 1991 as a fund manager and in 1993 he joined SG Warburg, now part of UBS investment bank, where he worked as equity analyst covering the technology sector for 12 years. Russ joined Shares in November 2005 as technology correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media by AJ Bell Group, he was appointed AJ Bell’s Investment Director in summer 2013.