Whitbread has bowed to pressure from an activist investor and announced it will spin off Costa Coffee into a separately-listed business.
The group, which also owns Premier Inn, said on Wednesday it will pursue a "demerger of Costa", which will be completed within two years.
It comes after activist investor Elliott revealed it had become the firm's largest shareholder last week with a stake of over 6%.
Whitbread chief executive Alison Brittain 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."
Ms Brittain said the separation, which will see Costa have its own listing, will create "long-term value" for stakeholders and will allow both firms to focus on growth in the UK and internationally.
Whitbread will remain the owner and operator of Premier Inn.
Costa is thought to be worth between £2 billion and £3 billion on a standalone basis while Premier Inn is valued at up to £8 billion.
Shareholder Elliott, along with Sachem Head, had been pushing for a break-up of the group.
It said in a statement: "Elliott is pleased that Whitbread has announced a demerger and has committed to doing so 'as fast as practical'.
"In Elliott's view this should be achieved within six months."
Shares in Whitbread were down 1% in afternoon trading.
Laith Khalaf, senior analyst at 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.
"The question will of course arise over whether CEO Alison Brittain jumped or was pushed into this proposal by the arrival of two activist investors on the shareholder register."
Alongside the announcement, Whitbread reported annual sales growth of 6.1% to £3.3 billion while pre-tax profits rose 6.4% to £548 million.
Annual figures also showed Costa booked a 1.2% 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 TGI Fridays, Pizza Hut and Marriott Hotels.
Costa, which Whitbread acquired in 1995 from founders Sergio and Bruno Costa, has more than 2,400 stores and is embarking on overseas expansion.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules here