Whitbread pension deficit drops by £136m; Costa and Premier Inn to split

Whitbread’s defined benefit pension deficit has dropped by £136m on and IAS19 accounting basis, as the group revealed plans to split the Costa and Premier Inn businesses.

Publishing its full year results today, 25 April, Whitbread said its deficit on an IAS19 basis at 1 March 2018 was £289m, compared to £425m at 2 March 2017. The reduction was attributed to deficit contributions of £101m and a change in mortality rate assumptions following the triennial review.

As a result of the triennial review, undertaken at 31 March 2017, Whitbread has agreed with the trustees to pay £85m each year from 2019 to 2022, with a final contribution of £57m in 2023. It has also said that contributions will be increased at a rate in line with dividend growth, when dividends increase by more than 5 per cent; this will continue until the next triennial valuation.

Furthermore, additional contributions to the pension fund of around £10m per year will continue to be made through the Scottish Partnership arrangements.

Along with its results, Whitbread has also revealed plans to separate Costa and Premier Inn, as it believes both can “thrive as independent companies”.

“The board, therefore, believes that it is in the best long-term interests of Whitbread's many stakeholders to separate Premier Inn and Costa, via a demerger of Costa. Announcing the demerger of Costa will provide clarity to shareholders, team members and other stakeholders on Whitbread's strategic direction,” it said.

Whitbread has set a target of 24 months to complete the demerger, in which it said would allow time to appropriately manage the Whitbread pension fund deficit and funding facilities.

Commenting, Hargreaves Lansdown senior analyst Laith Khalaf said the break-up will provide each of the two emerging companies with greater strategic focus on their own goals, and will allow investors to choose which of the two distinct brands they actually want exposure to. However, he noted that there are issues to be addressed such as the pension scheme.

Earlier this month it was revealed that one of Whitbread’s shareholders, Elliott Advisors, had put pressure on the company to split the businesses in order to create an extra £3bn of value.

The Times reported that Elliott Advisors believes a split would take less than five months and would cost less than £20m, after conducting research looking at the pensions and tax implications of such a change.

However, independent consultant John Ralfe told the paper that “spinning off Costa is not as easy as it sounds”.

“To compensate for the loss of future support from Costa, the pension trustees and The Pensions Regulator would expect a large chunk of cash to be paid into the pension scheme to be acceptable,” he added.

A spokesperson for The Pensions Regulator said: “Generally speaking, we expect any business planning a major corporate transaction to identify if there is potential material detriment to a pension scheme and explain how they will mitigate against that detriment.”

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