• Whitbread at the centre of the storm

The whispering about corporate activity at Whitbread is again picking-up with the leisure conglomerate now being tipped to launch a bid for budget hotel chain Travelodge.

Such a move seems the only way that the company will end the persistent break-up rumours surrounding it.

Early last summer, Whitbread hit the headlines with reports that private equity firms were lining it up for a break-up. As a former national newspaper financial hack, your correspondent understood the scenario well: the VCs fancied a go at Whitbread, didn't want to go hostile and so thought a few well-placed leaks might pile on the pressure. It has.

Whitbread is now the only large cap travel and leisure stock on the London exchange that can be easily labelled a conglomerate. Barely 10 years ago, investors would have struggled to find anything but leisure conglomerates.

Ladbrokes (now Hilton) was gaming and hotels, Bass (now Mitchells & Butlers and InterContinental) was pubs, bingo, brewing and hotels, Scottish & Newcastle was pubs and brewing, Allied Domecq was pubs, brewing and spirits and Rank Group – erm, where do you start / stop?

All of these companies have since been transformed into focused businesses or been bought (Allied Domecq) or dropped out of the FTSE100 (Rank).

Whitbread has done much to address its conglomerate status, notably quitting its centuries of tradition as a brewer and exiting upscale hotels, but investors are baying for more.

There is a constant stream of City analyst notes that highlight the break-up value of the group. Whitbread's current share price most likely contains a substantial premium due to such expectation.

Only two bits of Whitbread are worth more than £1bn – pub restaurants and budget hotels, with the latter by far the chunkiest part of the company with a valuation somewhere north of £1.7bn.

Sitting in CEO Alan Parker's chair, the rational, strategic option to pursue shareholder growth is to focus on Premier Travel Inn. Bolting on Travelodge for about £1bn would be a neat deal if it could be accompanied with the £1bn sale of the pub restaurant business.

The latter disposal is certainly possible. Quoted pub group Mitchells & Butlers is hotly tipped as a buyer and has the finances in place to do the deal. At its trading update last week M&B said it could raise up to £1bn.

But is Travelodge the right buy for Whitbread? The price of £1bn at first sight seems only slightly above the £712m Compass received from Permira in February 2003.

Since then, Travelodge has sold all of its freeholds, netting Permira £400m in a deal clinched late in 2004. Nonetheless, in the current heady climate, £1bn is probably the baseline for bids.

Whitbread snatched Premier Lodge against tough competition from private equity, including Travelodge's owner, and has both the motivation and means to conclude the deal.

The story in the Sunday Times at the weekend that Whitbread has sought clarification from the Office of Fair Trading about buying Travelodge is a mirror of how it went about the Premier Lodge deal.

Post a back-to-back deal, Whitbread is left with a business that spans leisure clubs, coffee shops, high street restaurants and a rump of upscale hotels, as well as being the dominant branded budget player in the UK.

The upscale hotels are already earmarked to go and should bring in £300m plus. The remaining parts are worth a little shy of £1bn with David Lloyd Leisure likely to fetch about £600m and the high street restaurants (Pizza Hut, TGI Friday's and Costa Coffee) just under £300m.

If Whitbread does not want to stagnate, it has to go overseas with its budget hotels operation. Previous attempts at overseas expansion have stalled but this time the need is particularly pressing.

There is enough financial muscle here to buy a significant presence in continental Europe for budget hotels. Perhaps B&B, owned by Eurazeo, or one of Louvre's chains, now in Starwood Capital's hands, might be a target.

In the nearer term, however, is the fascinating issue of how Parker might play the management issue at Travelodge. Would current head of Premier Travel Inn Patrick Dempsey make way for Grant Hearn, a former managing director of Travel Inn and current Travelodge CEO?

Hearn has been particularly impressive at Travelodge, growing the business faster than its rivals despite no funds to buy property outright. Instead, the group has pioneered forward funding for its developments and taken full advantage of the growing acceptance of hotels as leases.

Such an approach at Premier Travel Inn could transform that business and free up cash to fund any overseas forays.

All this assumes, of course, that the private equity funds do not turn hostile and mount a bid for Whitbread themselves. Given the huge amount of money most have tied up in their funds, the return of the barbarians cannot be ruled out.

Whatever happens, it seems unlikely that Whitbread will be able to continue in its present state.

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