Shareholder activism and coffee

If you are having a break, sipping coffee, but you cannot stop thinking about shareholder activism, we give you a compelling reason to explain your case.

In February 2017 Reuters reported Sachem Head Capital Management LP, activist investor holding 3.38 percent stake, wanted Whitbread’s management to examine a breakup as a way to boost the value of its individual businesses.

In April 2017 a unit of U.S. activist hedge fund Elliott Management, recognised activist investor, said it increased its position and held the largest stake (over a 6 percent) in Whitbread Plc. Elliott stressed that wanted the company to split its two divisions, Costa Coffee and hotels chain Premier Inn.

Last Friday 31st August 2018 Whitbread’s CEO announced the sale of the Costa Coffee chain to Coca Cola Co. for 3.9 billion pounds ($5.1 billion). It’s close to the 3.5 billion pounds to 4 billion pounds the division was estimated to be worth when investors first started to agitate for a breakup of Whitbread two years ago. As Costa’s performance stalled during last quarters, most analysts had since cut their estimate of its value to between 2 and 2.5 billion pounds. The agreement with Coca Cola Co. has been the preferred formula in front of the IPO alternative which had been considered.

According to Bloomberg data, the purchase values the Costa Coffee shops at about 16.4 times 2018 Ebitda — more than the 12.9 times multiple of Starbucks Corp.

According to some analysts, this valuation should make Whitbread’s CEO position more secure after she came under pressure from the two activist investors as Whitbread shares had slipped 12 percent since she took over in December 2015 — trailing the 21 percent gain in the FTSE 100 Index over the same period. Friday’s announcement sent the stock up by almost 20 percent.

Whitbread said it expects to return the “significant” majority of the money to shareholders, and the rest to reduce debt and contribute to its pension plan (see presentation of the sale) with the 3.8 billion pounds of net proceeds from the sale. In the coming months, it will be interesting to look at the stance of the two main investors in relation to the allocation of this fresh cash.

With this transaction Coca Cola Co. diversifies its struggling sugar drink business. “Costa gives Coca-Cola new capabilities and expertise in coffee, and our system can create opportunities to grow the Costa brand worldwide,” said Coca-Cola President and CEO James Quincey. “Hot beverages is one of the few segments of the total beverage landscape where Coca-Cola does not have a global brand. Costa gives us access to this market with a strong coffee platform.” Read Quincey's commentary on the announcement.

Once again, we have witnessed with this transaction, an example of how voting power has an impact in the evolution and the strategy of public companies. And how coffee and shareholder activism are, somehow, connected.