The splitting off of Costa will be “pursued as fast as practical and appropriate” to optimise value for shareholders, the group said. The deal is likely to be completed within two years.
Activist investors Elliott Advisors and Sachem Head together control about 10 per cent of Whitbread’s shares and had been pushing for change.
Alison Brittain, chief executive of the leisure giant, which also owns the Premier Inn hotel chain, said: “Given the progress Whitbread is making, 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.
“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.”
She added that the separation, which will see Costa gain its own listing, will create “long-term value” for stakeholders and allow both businesses to focus on growth in the UK and internationally.
Costa is thought to be worth between £2 billion and £3bn on a standalone basis while Premier Inn is valued at up to £8bn.
The coffee chain has more than 2,400 UK outlets, as well as some 1,400 outlets in 31 overseas markets. Costa Express has more than 8,000 vending machines worldwide.
Alongside the demerger announcement, Whitbread reported annual sales growth of 6.1 per cent to £3.3bn while pre-tax profits rose 6.4 per cent to £548 million.
The annual figures also showed that Costa booked a 1.2 per cent rise in like-for-like sales over the year, ahead of expectations.
Whitbread has a history dating back to 1742 and has over the years owned a bevvy of well-known brands such as TGI Fridays, Pizza Hut and Marriott Hotels. The group, which owns Brewers Fayre, acquired Costa in 1995 from founders Sergio and Bruno Costa.
Laith Khalaf, senior analyst at financial services outfit Hargreaves Lansdown, said: “Coffee shops and hotel rooms don’t make natural bedfellows, so splitting off Costa Coffee from Premier Inn makes sense for Whitbread.
“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.
“There are issues to be addressed, such as the pension scheme and the process of setting up a separate board, though the 24-month target for the demerger allows plenty of time for these matters to be resolved.
“The split could also ultimately lead to a shake-up of the top brass at Whitbread, unless the executives are willing to accept the reduced earnings potential running a smaller company probably entails.”
Greg Johnson, analyst at Shore Capital, said: “A cleaner operation should enable greater operational focus and afford investors greater clarity on profit and cash generation.
“The ongoing heavy lifting should begin to improve operating performance in the UK.”