The sale to private property company London & Regional Holdings and Bank of Scotland is scheduled for completion in early August. Whitbread expects the disposal to be earnings neutral in the current financial year.
The disposal of the David Lloyd chain was flagged at the time of its finals in late March, with the group announcing it had received some unsolicited approaches for the business. There was immediate speculation that the group was looking for around £1bn for the gym chain.
Whitbread says proceeds from the sale will initially be used to reduce debt. Subsequently, if there are no acquisitions, excess cash will be returned to shareholders net of a further payment into the group's pension fund.
Any return will be in line with the group's plans to increase its level of leverage by around £400m, roughly equivalent to moving from under four times adjusted net debt to Earnings Before Interest, Tax, Depreciation and Amortisation and Rent (EBITDAR) to under five times.
Whitbread's chief executive Alan Parker says the disposal will allow the group to proceed with its 'ambitious growth plans' for its hotel, restaurant and coffee shop business.'
Parker has sold a number of other Whitbread businesses since taking over three years ago. Pizza Hut and the TGI Friday restaurant chains have gone along with its four star hotel chain, leaving the budget hotels including Premier Travel Inn plus Costa Coffee cafes and pub restaurants.
Numis analyst Richard Carter says the £925m cash consideration for David Lloyd is £15m below its expectations but still represents a good price, with the implied valuation in excess of other recent deals in the sector.
He reckons that the group's targeted increase in the level of leverage implies a return of £1.3bn to shareholders, plus a £50m injection into the pension fund.
Acquisitions, of course, could change these projections and it is worth noting recent reports that Whitbread has entered a £700m bid battle for Irish hotel chain Jury's Inns. Whitbread is thought to be up against private-equity firm Permira and Robert Tchenguiz in the race for Jury's.
Carter says Jury's Inns would be a 'sensible bolt-on acquisition'.
More broadly, he regards the sale of David Lloyd as 'a key catalyst' in the next stage of Whitbread’s evolution into a focussed international hotelier. As such, he thinks the group will come under pressure for further disposals, with Costa and/or pub restaurants candidates. A takeover of the slimmed-down group cannot be ruled out either.
Numis reckons Whitbread is the cheapest of all the asset-backed UK leisure retailers (sector average 11.7x) and following today's announcement has moved its recommendation from 'add' to 'buy'.
The broker's target price of 2400p is based on a sum-of-parts analysis for Whitbread's 2009 full year and assumes a £1.3bn return of cash to shareholders.
Whitbread PLC shares moved up 11p to 1909p this morning. Based on consensus forecasts, that implies a forward 2008 PER of 24.8, falling to 21.7 in 2009. The prospective yield is 1.7%.
