The heat is on for Parker

There is a growing sense that Alan Parker must start delivering at Whitbread. The honeymoon period, created by his appointment and the bold decision to sell its four-star hotel division, is over. It's an important week for the company as this Wednesday is will update shareholders on current trading ahead of full-year results in May. Put simply, it looks as though the end of term report will read “Premier Travel Inn and Costa good, the rest, not so good”, which for too long has been the story at the leisure group. The business, which has been unkindly dubbed the civil service of the leisure industry, must start to hit its straps. Shareholders, not to mention Whitbread's highly regarded chairman Anthony Hapgood, are becoming increasingly restless. Parker must demonstrate that Whitbread in its combined form, with interests in pubs, restaurants, lodges and fitness clubs, has real benefits and muscle over the competition in each of its markets. Some have suggested that a break up is inevitable. The likelihood grows the longer the performance across the group fails to register notable improvement. While many predict a break-up, few suggest that Whitbread will do it on its own terms. Most theories centre on a private equity-led feeding frenzy when shareholders lose patience and demand the company be broken up and sold off. But there is little reason why Whitbread could not do a Six Continents, splitting businesses out into logical companies with focused management teams. The performance of Mitchells & Butlers, the pub and restaurant group, since it was spun out of the Six Continents business demonstrates how positive “break ups” or separations or divorces (call them what you will) can be. Equally, InterContinental Hotel Group - the other half of Six Continents - has also thrived. The resurgence of the two businesses is reflected in the shares. The combined price for the two groups is north of £12.00, compared to a pre-split price of about 500p. Both have benefited from a greater focus on their respective disciplines. It may point the way forward for Whitbread. The most attractive part of Whitbread continues to be its lodge division, a high quality business with a market dominant position. It has the highest return on capital of Whitbread's larger divisions, and the highest margins. To put this business in to context, Premier Travel Inn should make 50% more profit than Hilton's UK operations this year, and about 75% of the global profits of Accor's non full-service hotels division. Whitbread is already carrying out an extensive piece of work on combining Premier Travel Inn with Travelodge, its biggest rival, which is owned by Permira and expected to be put up for sale later this year. Whitbread has already approached the Office of Fair Trading to seek the regulators view over a combined lodge business. The Travelodge management team, who clearly want to stay with the business through a refinancing, were quick to rubbish a merger saying it would be “detrimental” to the development of Travelodge. But the statement served only to confirm the authenticity of Whitbread's Travelodge “project”. It is true that the two brands are becoming more differentiated in terms of pricing and amenity level, with Travelodge truly at the value end of the market while Premier hovers at the upper echelons of the two-star market, but who's to say that they will combined should an approach be successful? Whitbread may see value in a two-pronged strategy that allows it to segment the budget hotel market, especially if it is to venture into the pan-European market, taking on the likes of Accor. There also been much talk of the David Lloyd Leisure and Epsorta fitness club assets coming together under one business. It is eminently sensible that the premium end of that market be consolidated, but most of the talk has been of Esporta, backed by private equity, buying DLL when there is no reason why it could not happen the other way round. There is little reason why Whitbread should attempt to consolidate both the lodge and fitness club markets. It becomes more difficult to see a future for the pub restaurants arm within Whitbread, no matter how compelling or logical the structure of operating both lodges and pub restaurants. Parker has a skilled operator at the helm in Phil Urban but time may be against him. Years of underperformance cannot be arrested and reversed overnight. Despite being widely regarded as the finest managed pub portfolio in the UK - hewn from thousands of pubs in the brewing days of Whitbread - trading is lamentable. M&B's pubs are 70% more profitable. In fact the division now makes less profit than Greene King's managed pub division despite having average weekly sales some £6,000 higher at £19,500 against £13,500. More pointedly, many pubs in Greene King's estate are Whitbread cast offs. There remains a huge questionmark whether the Beefeater and Brewers Fayre brands, which seem outdated and uninspiring, have a long-term future. My understanding is that Urban is currently implementing a major over-haul of the brands. Urban is also injecting some much needed innovation into the division with the trial of a new country pub and dining concept at in The Ramblers' Rest, at Chipstead, Surrey. It too could benefit from the greater focus a bespoke pub-restaurant company would bring, but it is difficult to see Whitbread winning the war on three fronts. It clearly has aspirations to lead the budget hotel market and it could create value by spinning out DLL but to think it could also save the day in the pub restaurants too may be pushing the realms of reality. Some thing may have to give, and the pub restaurants would fetch a big price, possibly £2m a site, yielding £1.3bn. There is a good chance the pubs business could be sacrificed to facilitate strategic acquisitions in Whitbread's other markets. Then there is also the much-maligned high street restaurant business. Analysts have called for TGI Friday's to be merged with the pub restaurant division, where skill sets and operational expertise are complementary, but the barely profitable bar and restaurant brand would seem one of its more expendable businesses. Market chatter suggests Pizza Hut's US owner Yum Brands is looking for a partner to drive expansion in Europe and now maybe an opportunity for Whitbread to leverage an exit from the low yielding restaurant chain. Much is dependent on whether Whitbread will be allowed to bid for Travelodge. If the OFT views the lodge segment of the hotel industry as a market in its own right, then it will not but if it sees budget hotels as part of the hotel market, then it will. The latter seems the sensible view. It is hard to imagine that Whitbread would not be able to pay more for Travelodge than private equity, or attach a higher value to it than the public markets. That outcome will shape what happens with the rest of Whitbread. One private equity group that is monitoring events closely has reportedly nicknamed the exercise “Project Hovis”, because Whitbread is, in cockney rhyming slang, “brown bread”. It maybe wishful thinking for the venture capitalists but it feels as though more corporate surgery is inevitable.