Whitbread’s competitors should tread carefully after Costa sale

As the press was warming up for this issue of the magazine, news broke that the owner of Premier Inn, Whitbread, had sold Costa Coffee to Coca-Cola for £3.9bn.

Whitbread acquired the brand in 1995 for £19m when it had just 39 outlets, and had intended to spin off the chain as a separate business, but the transaction was “unanimously agreed” by the Whitbread board to be in the “best interests of shareholders”.

Given that a “significant majority” of the net cash proceeds of the deal will be returned to those shareholders – pushing the share price up 16% in a single day – I don’t doubt that unanimity.

But what does it mean for the hotel industry? On the face of it, it means a rationalisation of Whitbread’s business. A budget hotel brand and a high street coffee chain were arguably unlikely bedfellows, and a statement announcing the deal would suggest execs there felt the same: the sale will allow for a greater focus on “attractive structural growth opportunities for its leading hotel business, Premier Inn, in the UK and Germany”.

Whilst the word ‘hospitality’ goes some way to bridging the worlds of retail and hotels, ditching the bedevilled high street and establishing a laser-focus on hotels in a highly competitive market as it continues to boom is probably very wise. The other major consideration for Premier Inn’s competitors is that while the cash going to shareholders may be a significant majority, it is undisclosed exactly what proportion it might be.

If it is, say, 60%, what’s left over potentially for Premier Inn to benefit from could be a 10-figure windfall of investment in technology and marketing, or new openings, or debt reduction, or share buybacks. Their Costa investment has paid huge dividends, literally, and shows an ability to think in the long term. If I were CEO of a major hotel chain in the UK, I would be watching Whitbread very carefully.