Hobson: A Clean Break is Hard for WPP and Whitbread

THE WEEK: Morningstar columnist Rodney Hobson says the case for splitting up companies is not always convincing

Rodney Hobson 20 April, 2018 | 2:32PM

Costa Coffee owner Whitbread

A curious thing happened on Monday, showing that you really can have it both ways on the stock exchange.

Whitbread (WTB) shares leapt 7% after activist investor Elliott Advisers took its stake in the Costa Coffee and Premier Inn group up to 6%. Whitbread shares had already rallied 3% on Monday, so that makes 10% in two days after three years of sliding down.

It’s almost always good for any share price if someone buys a sizeable chunk but what really excited punters was that another activist investor, Sachem Head with 3.4%, wants Whitbread to be broken up, as does Elliott. They think Costa should be spun off into a separate business.

Whitbread has bought and sold various businesses over the years, starting with the disposal of its original brewing business and running to Pizza Hut, Café Rouge and David Lloyd Leisure, so another sale is a realistic possibility.

I'm not convinced that splitting a business up will create long term value unless various parts simply do not fit together, which isn't the case with Whitbread. But as a shareholder who got in after the worst of the slide in the share price was over, I’m grateful for the boost and intend to stay in.

Sorrell's Sprawling Empire

In contrast, WPP (WPP) shares dropped 6% on the possibility that the advertising giant will be broken up following the departure of Sir Martin Sorrell. Yet WPP is far more of a sprawling empire than Whitbread. It has more than 200,000 staff in 3,000 offices run by 160 companies through 1,800 subsidiaries.

Therein lies the problem. This was Sorrell’s fiefdom and there is a reasonable fear that no-one else will be able to get a grip on it, leaving WPP to break apart in chaos rather than an orderly fashion. Even if it stays together, it will take a giant of a man or woman to control it.

My personal view is that Sorrell, for all the money he has made over the years for his shareholders as well as himself, had to go and WPP can now move on. However, I’m glad to be a shareholder in Whitbread rather than WPP in these uncertain circumstances.

If you want to make out a case for a break-up, surely it has to be Associated British Foods (ABF), whose own name gives away the fact that clothing retailer Primark does not fit in with the main business of food production.

Primark struggled a bit in the six months to March 3 as shopping was hit by spells of bad weather in October and February but on the whole it has outperformed the food side and will probably do so again. Food is being held back by sugar, where revenue fell 12%. Falling sugar prices are a longstanding problem that is not going to get easier. In addition, ABF’s well known brands including Mazola, Ovaltine, Twinings and Kingsmill will come under increased pressure from supermarket price wars.

AB Foods won’t be broken up while it is controlled by the Weston family. It’s one of the disadvantages of having a small, tightknit group in control. The shares fell from £33.70 at the end of October to £24 in March. A recovery of £2.50 since then looks far enough to me.

Debenhams Loses Direction

I knew Debenhams (DEB) was heading in the wrong direction long before it put up the closing down notice at its Eltham store, the nearest one to my home. The poster says the nearest store is at Gravesend, 17 miles away. Does no-one at Debenhams know that there is a store at Bromley, just five-and-a-half miles away?

The only direction for the shares is down after a disastrous trading update. It is little consolation that Mothercare (MTC) is in an even worse mess, having lost its chairman and chief executive this month.

By all means visit the stores. Just don’t buy the shares.

 

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About Author Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.