FTSE in-depth: Buyout groups eye Whitbread

 

Cash-rich private equity groups are circling Whitbread.

Geoff Foster

Foster: Sporadic bouts of selling dragged the Footsie lower.

Rumours of a £4bn-plus breakup bid for the leisure giant by an Apax Partners-led consortium helped the shares advance to 1664p before they succumbed to the general weak trend to finish only a penny better at 1647p.

Whitbread's property interests are worth a small fortune and any offer would have to be pitched around the £23 a share level to stand any chance of success. Dealers have heard the jackanory many times before but they know you should never say never!

Mega cheap debt, record cash piles and the need to outpace sluggish economic growth is expected to unleash a wave of deal-making in the second half of 2011.

Whitbread could be the first blockbuster as private equity groups pounce and then eventually sell off its Costa Coffee and Brewers Fayre and Beefeater restaurant businesses.

The jewel in Whitbread's crown, the budget Premier Inn hotels division, would probably be retained and floated on the London Stock Exchange.

Last month comedian Lenny Henry opened the chain's 600th hotel in Stratford-Upon-Avon, the historical birthplace of Shakespeare.

The group plans to increase its UK room stock by 50% over five years to 65,000 rooms.

Broker RBS has recently suggested that boss Andy Harrison should de-merge coffee chain Costa as it is now capable of paying a dividend and could carry some £100m of debt.

Management at a presentation on the Costa business today is expected to only update plans for expansion into Eastern Europe and China, nothing more. Plans are in place to double Costa's estate size to 3,500 stores and its revenues to £1.3bn.

News that UK inflation rose to 4.5% in April, up from 4% in March, to its highest level since October 2008, convinced dealers that a rate increase will come before the end of the year.

Together with revived worries over Greek sovereign debt and lingering doubts about the pace of the global economic recovery, it prompted sporadic bouts of selling of blue chips which dragged the Footsie 62.69 points lower to 5,861.

Wall Street failed to provide any inspiration, falling 68.79 points to 12,479.60 following weak US industrial data and disappointing quarterly figures from computer giant Hewlett Packard.

The latest monthly global fund managers' survey from Bank of America-Merrill Lynch showed that fund managers have turned cautious on equities amid growing uncertainty about global growth. Some 41% of respondents are overweight equities compared with 50% in April.

India-focused refiner and power generator Essar Energy rose 12.4p to 424.65p after reporting record production from its refineries.

It says that all of its projects to build power stations are on track.

A JP Morgan Cazenove upgrade to overweight and an increase in net asset value to 358p a share helped 3i put on 7.7p to 294.10p.

The private equity investor has also agreed to buy Hilite International, a maker of fuel-efficient auto parts, moving into a fast-growing segment of the car market. Hilite's customers include General Motors, Chrysler and BMW.

Vodafone buzzed up to 172 14p and closed 1.45p better at 169.70p after reporting good results and an upbeat assessment for 2012 expectations. Full-year group revenues rose 3.2pc to £45.9bn.

Industrial engineer IMI retreated 64p to 1008p on gloom that the shares will not be included in the influential MSCI Europe index. Oil services group John Wood, 2p dearer at 646.25p, is the only UK addition.

A revival of the ancient CNOC 350p a share bid story lifted Heritage Oil 6.4p to 234.20p. Heavily sold recently in reaction to an acutely disappointing reserves report on its Bentley field in the North Sea, Xcite Energy bounced back to 220p before closing 3.50p up at 195p.

Brave buyers piled in following a Material Change Report in which the company said it intends to submit a field development plan for both the First Stage Production and Second Stage Production.

Broker Evolution Securities says this will allow the 87m barrels of contingent resources to be classified as reserves, taking the overall count to 115m barrels. On this basis, Xcite would look cheap.

Ariana Resources edged up 0.13p to 4.50p after announcing that a new vein system has been discovered at Kiziltepe, which is the sector of the flagship Red Rabbit Project in Turkey where gold production is set to commence next year.

Sound Oil, the Indonesia and Italy based upstream oil and gas company, added 0.43p at 4.78p. It has received permission to undertake planned work on its Marciano 1ST well in the Fonte San Domiano concession.

• West Africa-focused gold developer/producer Cluff Gold cheapened 4.88p to 89.13p on profit-taking despite confirmation that assay results from the first exploration drill hole at its Baomahun site in Sierra Leone have proved positive.

Gold was found in the Target 5 area. Chief executive Peter Spivey described it as a 'significant milestone' for the project and further results are expected in due course.