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Financial ranking of hotel groups: towards a new “big bang” (for the buck)?

Merge and acquisition deals involving several hotel operators made their come-back in 2014 and early 2015, through numerous “midcap” deals. In contrast, the ranking of leading hotel groups has not changed much over recent years. Considering financial markets’ current tectonic shifts, will it remain so?

Key executives and analysts from the hotel industry entered 2015 with a positive outlook, on the back of positive supply and performance growth in the industry, and as a window of opportunity for strategic deals seemed to open. Indeed, financial markets are buzzing with rumors, fueled by announcements such as Starwood Hotels & Resorts’ board decision to hire investment bank Lazard to explore “a full range of strategic and financial alternatives to increase shareholder value,”, with “no option off the table,”, according to Bruce Duncan, Chairman of the Board. Add to such statements the resignation of former CEO Frits Van Paasschen and an $800 million asset disposal target for 2015 alone (which the company is on track to deliver thanks to the sales of Gritti Hotel Palace in Venice, Italy and Phoenician Resort in Arizona): no wonder financial strategists are on the lookout. And while Starwood is more or less officially testing the waters, undoubtedly other strategic moves are on the table of Boards at other hotel groups’. “Animal spirits” are definitely in the air in 2015, but will they eventually unleash?

Actually, 2014 and 2015 have already been marked by a comeback of merger & acquisitions deals involving two hotel operators, yet this is occurring through numerous midcap deals which are often relevant from a long-term perspective. Following selective “stock-picking” tactics, hotel groups have been using abundant liquidity, available on equity and debt markets (doped-up by Quantitative Easing policies) to consolidate their position on hotel markets where they could reasonably expect upside revenue and/or cost synergies. Marriott International recently took over Delta Hotels & Resorts for US$135million; its newly acquired portfolio of 37 hotels and close to 10,000 additional rooms will make the group the leader on the Canadian market, plus the performance of these hotels should benefit from their integration within Marriott’s distribution system. IHG purchased Kimpton Hotels & Resorts for $430 million: in addition to its 12,000 room stock and 3,000 room pipeline, the Kimpton “lifestyle” brand itself will surely be a nice fit for IHG’s brand portfolio. Wyndham recently purchased Dolce Hotels & Resorts for $57 million, which also boosts the number of rooms it operates under management, as opposed to franchise. In Europe, a major upheaval in 2014 was the takeover by the Chinese Jin Jiang of Louvre Hotels Group, the 4th largest group in the EU, for nearly 1.3 billion Euros (an amount that also includes the acquisition of Baccarat crystal and Annick Goutal perfumes). In Nordic markets, a major consolidation move took place when Scandic Hotels took over one of its main local competitors, Rica Hotels, adding 71 additional units located in Norway and Sweden to its local portfolio. In the British Islands, Dalata Hotel Group acquired Moran Bewley’s Hotel Group and its 2,500 luxury rooms for 455 million euros.

On emerging markets, consolidation moves are also under way. In China, leading groups are strengthening their position by acquiring local competitors, for instance with Home Inns purchasing the Yunshang Siji Hotel Management Co in 2014. In early 2015, the Spanish NH Hoteles took over a Colombian group, Hoteles Royal, which operates 20 hotels (2,257 rooms) located in Latin American countries. Although the size of the deal is modest, it is noteworthy as it testifies the renewed capacity of Spanish hotel operators to undertake M&A operations, which is likely to sustain the transaction market in Latin America, all the more so since these countries posted solid performances in 2014. Overall, groups that used to be financially embattled have recovered from the crisis years and are now looking to the future with renewed expansion plans. The British Travelodge for instance sold a 144-hotel portfolio to a consortium of investors for £500 million in 2014; and the NH deal, although largely self-financed, highlights a return to better confidence.
However, the number of “midcap” deals highlights the corresponding lack of a major move that could deserve being called the “big one” of the decade. And indeed, the ranking of the Top 7 groups has not changed dramatically over the past decade. Such stability at the top has not always been the case: do you remember when Bass International competed with Cendant Corporation, or when Starwood took over ITT Sheraton after a stock market face-off with Hilton?

Over the past decade, much of the financial headlines of leading hotel groups related to their focus on franchise and management and on asset disposal programs, strategies long favored by activist shareholders. However, this storytelling does not offer as much leeway to generate financial value as over recent years, given that most portfolios are already “light” in assets. As of January 1, 2015, IHG, Marriott, Wyndham and Choice have less than 10,000 owned & leased rooms. Even Accor (with about 53,000 owned rooms), which has turned its back on asset disposals, and Hilton (about 59,000) have fewer assets than they used to. With 13,500 owned & leased rooms –although these are highly valuable trophy assets– Starwood Hotels & Resorts also has a finite stock of assets to dispose of. And as the group ranks #3 worldwide among hotel groups in terms of enterprise value, it will probably not be that easy for it to find a long-term partner. Indeed, the financial ranking of hotel groups offers a different view on leading hotel groups: Hilton Worldwide ranks first in enterprise value ($39.5 billion as of June 1, 2015) for the second consecutive year, above Marriott International ($25.4 billion). Starwood Hotels & Resorts, Wyndham Worldwide, Accor Hotels and IHG are in an $11-17 billion range.

Over the past decade, changes in groups’ market capitalization highlight that they generally delivered results to shareholders, especially considering that in the meantime most companies generously distributed net proceeds from asset disposals to shareholders. Yet hotel executives feel rising pressure to deliver better, much better,  as investors fret over  the tectonic shifts under way in our industry. Over the past 5 years tech companies have achieved sizable market valuations, overtaking some well-established businesses. For instance, Priceline (parent company of, Priceline, Agoda, Kayak…) now trumps major hotel groups with no less than $62.4 billion in financial value. The market value of Expedia is between those of Wyndham and Accor, while TripAdvisor’s is close to that of IHG. And distribution platforms are not the only players making headway: in March 2015, AirBnB, the world’s leading accommodations marketplace, has closed a round table valuing its business at $20 billion, making it the virtual #3 accommodation business in terms of market valuation, after only Hilton and Marriott –and for how long? Considering how fast OTAs and “alternative” accommodations businesses have grown, there should be no doubt that existing hotel groups will face rising pressure to adjust and grow to compete on a global scale. This will be a natural engine for strategic moves. The years to come sound exciting!

For more information, read our 2015 Worldwide Hospitality Report

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