Whitbread has bowed to pressure from an activist investor and announced that 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.
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.
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.