What next for Whitbread?

Whitbread has tried and failed to buy so many leisure groups over the past 12 months that a cynic could have been forgiven for taking any recent bid talk with a pinch of salt. It will have come as a surprise to the sceptics, then, that the pubs and hotels group actually managed to complete a deal yesterday when it acquired 16 UK Marriott hotels for pounds 180m. Indeed, if market speculation is correct, Whitbread could be about to make two swoops in the same week, with persistent rumours that it will swallow David Lloyd Leisure.

The deals raise two questions about Whitbread. One is whether it is making the right strategic moves in the hotels market. The other is the future of the original brewing business, which now accounts for only 14 per cent of group profits as Whitbread concentrates more on leisure and retailing.

From a standing start in hotels 10 years ago, Whitbread has been making impressive progress of late. It started with a three-pronged approach, including leisure-based four-star hotels, the Lansbury three-star brand and the budget Travel Inns group. Since new hotels management was brought in three years ago, Whitbread has decided to pull out of mid-market three- star hotels and concentrate on four-star and budget sites. But while the cheap and cheerful Travel Inns group powered ahead, the group of 14 four-star Country Style hotels remained too small to have critical mass.

Yesterday's deal with Marriott should help change all that. It gives Whitbread access to Marriott's worldwide reservation system, and to Marriott's main customer base in America and the Far East. These are just the type of people who might book a four-star luxury break and take in a few rounds of golf on the hotel's adjoining courses.

The thinking in hotels now is that size is once again the key factor in hotel-chain performance, so the Marriott hotels can be expected to benefit from improved buying through Whitbread's system. This, together with increasing occupancy rates and improving profit margins in UK hotels, bodes well for Whitbread. The group has now moved up from sixth to third in Britain's hotel league behind Forte and Mount Charlotte Thistle.

With Whitbread's pubs and inns division performing well, the company must now decide what to do with its brewing division. After losing out to Scottish & Newcastle in the bid for Courage, Whitbread now finds itself demoted to Britain's fourth-largest brewer with a share of only 12 or 13 per cent. A bid for Greene King or Marstons may convince the City that Whitbread still means business in brewing. The other alternative would be to sell it.

Panmure Gordon is forecasting profits of pounds 280m for the current year. With the shares down 3p to 622p yesterday, this puts Whitbread on a forward rating of 14.7. Good value.