April 25, 2018 / 6:37 AM / 3 months ago

UPDATE 3-Costa Coffee to break from Whitbread after investor pressure

* Whitbread came under pressure from activist investors

* Costa has attractive international opportunities - CEO

* Shares fall 1 pct

* Costa is Britain's biggest coffee chain (Recasts headline and lead, adds shares, analyst reaction)

By Paul Sandle and Rahul B

LONDON, April 25 (Reuters) - Costa Coffee will be spun off as an independent business after owner Whitbread yielded to pressure from hedge fund investors who saw value in breaking up a group that also runs the Premier Inn hotel chain.

Costa Coffee, second in the global coffee shop market after Starbucks Corp, had attractive long-term international opportunities, Whitbread said.

The move will leave former brewing group Whitbread with its Premier Inn hotels and Beefeater and Brewers Fayre restaurants once the split is completed within 24 months.

Investors, lead by activists Paul Singer's Elliott and U.S.-based Sachem Head, have been pressuring the British company to split itself up to help unlock value.

"We are confident that both Premier Inn and Costa will soon be businesses of sufficient strength, scale and capability to enable them to thrive as independent companies," Chief Executive Alison Brittain said.

Shares in the group, founded as a brewer in London more than 200 years ago, reversed early gains to trade down 2 percent at 41.01 pounds at 0910 GMT. That values the company at around 7.6 billion pounds ($10.6 billion).

They had been at one-year highs in recent days after reports said Brittain believed a spin-off was inevitable.

Morgan Stanley, which rates Whitbread "equal-weight", said the demerger could trigger takeover interest in Costa.

Ed Meier, a manager of the Old Mutual UK Equity Income Fund, which is a Whitbread investor, welcomed the move.

"As long term shareholders in Whitbread we feel this is the right decision to maximise shareholder value over the medium term, though we sense allowing 24 months for the process is longer than most would have anticipated," he said.

Brittain said the split would be pursued as fast as practical to optimise value for Whitbread's shareholders.

RAPID GROWTH

Costa, founded in London in 1971, has expanded rapidly since it was acquired by Whitbread in 1995. It now has more than 2,400 shops in Britain, over 1,400 stores in 31 international markets and over 8,000 Costa Express self-serve units.

Since taking the helm in 2015, Brittain has driven Costa's expansion in China, a market where Costa's only larger rival Starbucks is planning to more than triple its over 3,000-store network within a decade.

"Costa will become a listed entity in its own right and the clear market leader in the out-of-home coffee market in the UK," she said.

"Costa will also be well positioned to build further on its strong international foundations with growth expected in China and Costa Express."

However, over the last two years, Whitbread, like many other consumer-focused companies in Britain, has felt the pinch from higher inflation and low real wage growth in its home market.

Costa's like-for-like sales in its British stores slipped 0.3 percent in the final quarter of the year, it said on Wednesday.

Whitbread reported a 4.5 percent rise in underlying annual profit before tax to 591 million pounds, beating a company-compiled forecast of 585 million.

Costa had underlying operating profit of 159 million pounds, while Premier Inn generated 498 million on the same basis. ($1 = 0.7167 pounds) (Additional reporting by Sarah Young, Simon Jessop and Maiya Keidan Editing by Guy Faulconbridge/Keith Weir)

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