The big strategy reset a fortnight ago from Whitbread, the owner of Premier Inn, got a ho-hum response from the stock market for understandable reasons. The company said shutting Beefeater and Brewers Fayre restaurants, or converting the space to hotel rooms, would involve upfront costs. Most of the goodies in the five-year plan, launched only two years after the last one, are intended to come towards the end of the period, which makes them less certain in the eyes of the market.
The big prize, according to Whitbread’s chief executive, Dominic Paul, would be an improvement in annual returns on capital from a pedestrian 11% to a decent 16%. But shareholders, already digesting a whack from Rachel Reeves’s changes to business rates, would have to wait a while for the “higher-margin, higher-returning pure-play hotel business” to appear.
Agitating US hedge funds aren’t famed for their patience and here comes Corvex Management, which didn’t sound happy beforehand, switching its tone to furious. In an open letter on Monday, it called on the board to put £3.9bn Whitbread up for sale. In the meantime, it wants key features of Paul’s plan, including a planned £1.5bn sale-and-leaseback of hotel properties to fund the opening of more rooms in the UK and Germany, to be suspended. If the Whitbread board won’t budge, Corvex is “fully prepared to nominate a new slate of directors”.
This demand for “a formal sale process” is odd. Whitbread is a listed company without a single large shareholder so it is, in effect, up for sale every day. If a rival hotelier, private equity fund or anybody else wishes to make an offer at a reasonable premium, the board would be obliged to consider it, especially in current circumstances. It is hardly a secret that the sleepy share price carries an “implied market discount to our inherent value”, as Paul put it last month. Yet he also has to manage the company, and allocate capital, on the basis Whitbread will still be around in a few years’ time.
That will be irritating to Corvex, whose description of its 7% stake as “an economic interest” (which probably means there are derivatives, not just shares, in the mix) suggests it was hoping for more instant gratification. Corvex is free to nominate a director if it wishes but, before it gets to that stage, it should probably clarify how it thinks Whitbread should proceed if no bidders show up.
Whitbread’s sale-and-leaseback plan was widely assumed to be a response to the hedge fund’s pressure. If executed, it would take Whitbread’s freehold exposure down from 50% to 30%-40%, as low as it’s been in recent history but within the “sweet spot”, as Paul called it, for retaining an investment rate on the debt while freeing up capital. If, in fact, Corvex is a diehard fan of retaining freeholds in all circumstances, it should say so.
Its deep frustration is clearly the share price. The market is “ascribing zero value to Whitbread’s remaining leasehold business, its German hotel assets and its development properties currently under construction”, complained the letter, a plausible financial analysis. But, in the absence of a bid, the company has to attempt self-help measures, such as finding a way to free up capital to buy back shares for less than they are supposedly worth.
Morgan Stanley’s analysts called the revised five-year plan “sensible, credible and material”, pointing to a probable resumption of buy-backs in 2028 from the £2bn of free cashflow Paul is projecting by 2031. True, it’s all a little slow. But what else is Whitbread supposed to do? Simply declaring you’re open to takeover bids is not a strategy.
