“Cash is king”, according to the proverb. Of course, this is probably no longer quite so true in a world where liquidity has been made abundant by central banks and where financial markets are above all on the lookout for yield and growth. But the fact remains that it is still a real weapon when it comes to implementing a business strategy. And the world’s hospitality leaders are not short of ammunition, deriving from the business performance or financing facilities in recent years. But what do they do with this often abundant liquidity? Strategies diverge, and may reveal different visions of their future.
Over the last three years, the most important listed Western hotel groups (i.e. 6 of the top 7 global groups) generated nearly 5 billion US dollars in annual cash flows from their combined operations: high levels, supported by solid business performances in a favorable global economic context.
The momentum is also favorable: the liquid assets generated by the activity of these world champions grew to 5.7 billion dollars in 2017, from 5 billion dollars in 2015. But this upward trend was almost exclusively driven by two operators: Marriott International and AccorHotels. These two groups have made the decision to grow through investment as demonstrated during this period by their major acquisitions of Starwood Hotels & Resorts and FRHI respectively.
This is naturally reflected in the cash flows from other investment activities (excluding fixed assets and Capex on existing assets): in 2016, these two groups accounted for the bulk of the total of more than USD 6 billion disbursed in external growth operations. In 2017, however, their strategies diverged: while Marriott International focused on digesting its mega-deal, drawing cash from new real estate disposals of ex-Starwood hotels that had joined its portfolio, AccorHotels continued its investments, albeit at a more modest pace. In addition to these two major operators, the other groups (Wyndham Hotels & Resorts, IHG, Hilton Worldwide and Choice Hotels) also invested more than they sold in 2016 and 2017. It is necessary to add to this table the Chinese actors, listed or not, that simultaneously multiplied their acquisitions, notably Jin Jiang with the French group Louvre Hotels and then the Chinese Plateno Hotel Group and Vienna Hotels Group or the Indian Sarovar Hotels & Resorts.
Since 2016, a real inflexion took place in the hotel sector. During the previous decade, operators tended to generate cash from asset disposals (mainly real estate), a trend that continued in 2015 with Hilton Worldwide, IHG and Starwood (now in Marriott’s accounts). But the ratio between disposals and investments has now returned to equilibrium, with cash flows from property sales tending to finance new acquisitions.
On the other hand, the Capex, (funds allocated to investments in existing assets), are increasingly being reduced. Almost entirely relieved of their real estate and engaged in complex financial operations, hotel groups have chosen to continue to compress the Capexes which they carry by themselves (at less than an accumulated US$500 million for the 6 groups in 2017).
They therefore look elsewhere to develop their EBITDA, generate synergies and acquire assets, even technology: booking engines, yield management, rental platforms between individuals, e-conciergerie, etc..
This is essentially a natural development since hotel groups have changed status from owners of the walls and business to owners of management contracts. All these motivations therefore support external investments. But such operations must also be financed.
To complete its acquisition of Starwood in 2016, Marriott relied on debt issuance. But the world leader is not the only one: all major Western hotel groups took advantage of the window of opportunity that opened that year, refinancing and raising corporate debt at advantageous rates. In 2017 and early 2018, the dynamic was more about refinancing or extending maturity than net debt issuance, as available cash was already abundant.
On the other hand, the French group AccorHotels is the only major Western hotel group to have issued shares in recent years. This operation has enabled it to finance the acquisition of FRHI and to open its capital to new shareholders. American leaders Marriott International and Hilton Worldwide adopted the opposite strategy, increasing share buybacks. This form of cash redistribution to investors, which has the advantage of mechanically supporting their share prices, reached an unprecedented level in 2017 and could reach a new level in 2018.
AccorHotels has, in fact, announced a share buyback program of €1.35 billion ($1.6 billion) over two years, thus redistributing to its shareholders a portion of the €4.6 billion generated by the sale of 57.8% of its HotelInvest real estate business. For their part, the American leaders are continuing their momentum: Hilton raised its share buyback ceiling to 1.3 billion dollars in 2018 and Marriott aims to distribute 3 billion dollars to its shareholders in the form of dividends and especially share buybacks.
The latter option appears to be preferred by most hotel groups. Only IHG stands out as the leader in dividends it pays to shareholders, particularly in 2016 thanks to proceeds from property disposals in the previous year. However, dividends provide investors with a return without raising the share price, thus without backing a company’s market capitalization. IHG’s capitalization is therefore gradually shrinking with respect to several of its main competitors: this is not likely to silence the rumors of takeovers or mergers that regularly animate the financial markets.
The same is true for Wyndham Hotel Group, the hotel division that sprang from the split of Wyndham Worldwide, and to a lesser extent for Choice Hotels: their cash-flows and more moderate capitalization - despite their global reach and solid portfolio in franchise and management contracts - make them potential choice targets for a next wave of consolidation.
Thus, groups’ strategies stand out more clearly. While Marriott International and AccorHotels play the role of hunters and ready themselves for the next hit, Wyndham Hotel Group and Choice Hotels look more like targets. Hilton Worldwide and IHG, which are less active in terms of acquisitions, chose to focus on maximizing shareholder distributions, but not in the same form: while the first boosts its list price on the stock exchange through share buybacks, the second distributes dividends to shareholders.
But to anticipate changes to come, it is important to broaden the scope particularly because hotelier-operators consider themselves to increasingly be the actors in travel, in the broader sense. Attesting to this is AccorHotels’ recent interest in the national airline Air France and the conglomerate model that is preferred by Asian groups, in particular Chinese groups such as Jin Jiang and BTH Hotels.
And yet, when it is no longer about hotels alone, but travel, or accommodations, the perspective changes: hoteliers are far behind the leading OTAs, which have capitalization up to 100 billion (Booking Holdings). And in the digital world, these are far behind GAFAA (including the Chinese group Alibaba), each of which is worth more than 500 billion dollars.
However, while hotel groups and their ecosystem of owners control the assets, clientele have for the moment largely passed into the hands of the OTAs, the new essential travel intermediary. But is their situation so favorable? If the attempts of the GAFAAs have so far failed in the travel world (think Amazon Travel, Google Hotel Finder...), their incomparable strike force makes them a constant threat. This can be through innovation - and as such their lead in voice control systems should not leave players in the sector indifferent - and also buybacks. Trends in other sectors invite consideration: for example, AT&T’s takeover of Time Warner signals a revival of vertical integration within the same industry, broadly defined.
If we look into the medium-term future for the hotel industry, two types de servuction appear destined to become predominant: - Those services that can be provided without human interaction, such as “digitizable / robotizable” requests intended to be delivered by the digital giants. - Services implicating a human point of contact, and thus a staffcentric approach to hospitality provided by hoteliers.
In this context, after a first wave of consolidation movements between players of the same type (hotel groups, OTAs, tech), this is no longer the only strategic option available to the managers and the boards of the leaders. Didn’t Goethe say, ‘‘What species do all these people belong to, whose souls are based only on the label, whose thoughts and efforts for years tend only to advance by one seat towards the head of the table?”
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