While shareholder Blue Whale Capital says the business should adopt a franchise model similar to IHG, Bernstein analysts favor expanding Premier Inn’s business in Germany. Others say the division might be bought.
Setting a course for the Premier Inn budget hotel chain will be the company’s main priority after Costa is jettisoned and there’s no shortage of ideas in the market about how that can be achieved.
“I’m not sure we’ll be talking about Costa much longer,” said Ed Meier, a London-based fund manager at Whitbread shareholder Old Mutual Global Investors. “It’s widely expected that it will get bid for before a demerger process is complete, at which point Premier Inn gets bid for as well.”
The increasing prospect of corporate change is reflected in Whitbread’s share price, which has risen about 6 percent since activist Elliott Advisors appeared on the shareholder register last month.
The U.K. company has acknowledged that the likelihood of an approach for either Costa or Premier Inn has probably increased given the announcement that it will seek to demerge the coffee-shop chain within two years. Whitbread declined to comment.
Analysts and shareholders are debating what strategy would best suit Premier Inn as a standalone business. The chain operates more than 780 hotels in the U.K. and has been expanding into Germany. It aims to lower the number of properties it owns to about 60 percent from 64 percent.
According to Blue Whale Chief Investment Officer Stephen Yiu, a franchise structure would offer higher returns on capital as well as less volatile revenue and cash flow, allowing Premier Inn to expand more quickly in the U.K. and overseas. Shares in Whitbread have returned 468 percent since the end of 2008. The UK-company could achieve a comparable outperformance to InterContinental by pursuing a similar strategy.
“We want Whitbread to generate significant cash from the sale of their properties to external parties and focus on fee-generating activities, particularly franchising,” said Stephen Yiu.
Not everyone agrees.
Bernstein analyst Richard Clarke sees Premier Inn’s much smaller hotel network, as well as its lack of a recognized franchise brand and loyalty program, as hurdles to the chain charging a royalty rate close to that of IHG and Accor.
The company could sell some of its hotel properties in the U.K. to invest in the German market after the Costa spinoff is complete. “Premier Inn needs a growth outlet, and at the moment the most likely option is Germany,” said Richard Clarke. “We don’t know yet whether the Premier Inn brand resonates there, but if they could increase their presence through buying more hotel properties or a rival, it would help them grow faster.”
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