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Financial ranking of groups: Muscle-flexing among hotel & digital travel industry leaders

At a time when the barriers between the hotel industry and commercial accommodations have come down, and hotel champions are being overthrown by new digital players that meet consumer needs, other factors (market cap, distribution...) define the new power struggles between the different actors and shed light on their outlooks.

For hotel groups, 2015 and the first semester 2016 were particularly rich in strategic planning. While the last decade was marked by remarkable stability in the global ranking of groups (sometimes even with no change in the ranking of the leaders from one year to the next), the merger & acquisition operations are multiplying. Thus the hotel ranking for 2016 is marked by many changes: surpassing the million-room milestone, the arrival of a Chinese player in the Top 5 worldwide… all obtained through major mergers/acquisitions. So what happened to hotel groups that have been adept at organic growth and asset sales for so long? Several factors played a catalytic role in this new trend.

One of these motors is naturally the massive availability of liquidity on the markets, due to the strong climb on equity markets and weak interest rates due to the effect of “quantitative easing” policies at central banks. In the end, this had an impact on good quality corporate obligations: many hotel groups were thus able to issue debt obligations at lower rates than ever, thereby further strengthening an already full cash reserve. Today these funds allow them to position themselves on major operations, even if the competition is tough, because potential buyers –operators and private equity alike – are increasingly numerous: to the cash-rich Western actors may be added the emergence on the global scene of Asian hotel operators, conglomerates, and financial groups. But competition among buyers presents no obstacle to raising funds: if the funds are not used for merger-acquisition operations, then the cash can be invested in buying shares or further accelerating organic growth by financing new hotel projects. This strategy accelerates their opening, and thus future revenues from fees, while asset sales make it possible to quickly reinvest capital. Directing means foresight: many players who have applied this rule now have the capital they need to invest.

The first catalyzer of recent strategic operations, however, is clearly the emergence of players come to upset the established order. The rise in power of OTAs and their consolidation at the heart of a few major groups and now the surge in the sharing supply with AirBnB in the lead upset former balances. For hotel groups the challenge is not so much about increasing their market shares with respect to other hotel groups as increasing their strength with respect to non-hoteliers. This is particularly true regarding OTAs (which capture a growing share of the added value by making themselves a major distribution channel) and actors in the sharing economy, the mere existence of which is a challenge for the economic model of the traditional hotel industry.

The values of the main players listed on the stock exchange, and the underlying values of fundraising in the case of AirBnB, translate these new balances. Priceline Group (the parent company of, Kayak, Agoda…) was already worth 61 billion dollars in January 2015 and close to 73 billion in October that same year, more than twice the value of the leading hotel groups. At the same time, Expedia went from 11.4 to 17.3 billion dollars, AirBnB climbed from 20 to 25.5 billion dollars, while most of the publicly listed hotel groups watched their values slide As profits shift from the P&Ls of hotel groups to those of OTAs, so do their respective market values and share prices.

It was thus important to take action. In 2016, the takeover of Starwood Hotels & Resorts by Marriott International, announced at the end of 2015, allowed the group to rise above AirBnB and Expedia –particularly powerful on the American market, which is the most strategic for the group– in terms of valorization. This consolidation, whose finalization is still underway, following a bitter battle that set it against a Chinese buyer (the insurance group Anbang), allows the new “pro-forma” group to surpass Hilton Worldwide in the financial ranking of listed players in the accommodations sector. After Marriott and Hilton, AirBnB already presents itself as one of the primary values for the industry, even if it has not yet been realized in that the new champion of sharing accommodations has not been introduced on the Stock Exchange. Just after: Expedia. Expedia surpassed AccorHotels and Wyndham Hotels & Resorts in 2015, a year when its shares experienced strong growth in value. However, Expedia’s value dropped at the beginning of 2016 despite the takeover of HomeAway that was announced and finalized at the end of 2015. The financial markets are, in fact, globally more challenging with respect to the future perspectives of digital players. The new AccorHotels and Fairmont Raffles Hotels International ensemble is now on the heels of Wyndham Hotels Group and has deepened the gap with IHG and Hyatt.

Corporate valorizations highlight another financial hierarchy that reflects the financial capacity of the different players to realize, if they so wish, new acquisitions in the future. While the Marriott International + Starwood Hotels & Resorts ensemble will probably continue to digest its merger in 2016 –particularly since the operation was already rich in rebounds– other actors will undoubtedly be under the pressure of the market or key shareholders. This could be, for example, the case of Hilton International, Wyndham Hotels & Resorts and InterContinental Hotels Group that did not partake in the major trend of deal making in 2015 like Hyatt Hotels Corporation and Choice Hotels, which have a lower value nonetheless, thereby reducing the scope of possible targets.

Sébastien Bazin, AccorHotels, et Greg Marsh, Onefinestay

This financial approach also reflects the perception of other economic actors: that of a tourism industry where OTAs, hotel operators and players in the sharing economy compete freely. It is also evident in the policies of headquarters: strategic moves no longer focus exclusively on the core trades of each, but increasingly on an effort to expand the territory into other areas. Concretely this results in the takeover of different players in the sharing economy (and online distribution) by AccorHotels with SquareBreak, Oasis Collection and Onefinestay; while Expedia took over the historic champion of vacation rentals, HomeAway (VRBO, Abritel, Homelidays…). In a world where profitability is driven by the capacity of a player to be the preferred interface with consumers, the strength of accommodations actors –both traditional and not– may be measured with regard to the volume of rooms and other tourist accommodations sold during the year.

This table illustrates the importance players give to distribution, particularly online distribution. Thus, the merger of Marriott and Starwood results in a supply of 1.1 million rooms worldwide, better geographic coverage, critical size on many markets, and most importantly more strength in negotiations with respect to OTAs. In terms of rooms sold per year, the new group thus surpasses Expedia once again. In China, the takeover of Plateno and Vienna Hotels places Jin Jiang 5th in the ranking of hotel groups worldwide, allowing it to reasonably outdistance the Chinese OTA Ctrip while achieving the global coverage of its key European competitor, AccorHotels, in which it owns 15% of the capital (which it would like to grow). After Choice Hotels, AirBnB is not far off, and is experiencing a phase of exponential growth. Between the organic growth of certain players and the dynamism of mergers-acquisitions, the future financial and distribution hierarchies can be expected to change, because in the accommodations industry the “big is beautiful” motto is back full swing.

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