Consolidation: Let’s get togetherby Katharine Le Quesne
After a decade of intense global consolidation in many other industries, it is finally the turn of hotels. Hotel transaction volumes have recorded their highest levels since the last peak in 2007, fueled by market growth, brand proliferation and low interest rates in the US and Europe.
Over the past five years, deals have predominantly been underpinned by one or more of the following drivers: new markets; new products; management talent/operating platform; and game-changing scale. Whichever driver it is, the principal objective is to create value through consolidation.
New market entry has been a priority for Chinese operators, seeking to tap the growing domestic middle market and an outbound market, estimated to reach 200 million by 2020. In the past five years, large domestic players (including Fosun, HKCTS, HNA, Jinjiang, Wanda) and investors (Anbang and Sunshine Insurance) have all expanded overseas with the Chinese government’s blessing. Many are conglomerates, with business units following a vertical integration model – an approach that the North American and European hotel industry has long moved away from.
HNA is a typical multi-division behemoth with significant tourism interests, including hotels and airlines. Over the past three years, they have invested an estimated US$10 billion in building a global hotel business. They began with minority interests in NH, Pierre et Vacances, Red Lion and Tsogo Sun; and in 2016, they stepped up a gear with billion-dollar investments in Carlson (100%) and Hilton (25% stake for US$6.5 billion). They closed 2016 with a mandatory offer for Rezidor Hotel Group AB (having acquired Carlson’s 51.3% interest earlier in the year). In most investments, they have a seat on the board, which provides valuable insights into operations, market trends and strategy.
Hotel owner-operator Jinjiang adopted a similar strategy, entering into a series of joint ventures and strategic alliances, before its surprise acquisition of Louvre Hotels in 2014 for €1.3 billion. The deal catapulted the company from 9th to 5th largest hotel company in the world, according to Hotels Magazine. They not only entered new markets, but achieved game-changing scale and a management platform in Europe. The group has since acquired a minority interest and board position in Accor.
Chinese conglomerate, Fosun, made headlines with its protracted €900 million (US$1.1 bn) take-private of Club Meditérranee (Club Med) in 2015, after several years as a minority shareholder. The company is now in growth mode, with plans for three to five new resorts per year from 2018. Fosun went on to acquire stakes in travel agent Thomas Cook; the company now has an 8.4% interest in a powerful accommodation, travel and distribution platform.
Stake building has proven to be a preferred low-risk approach for entering new markets and new product segments.
New product acquisition has been concentrated in the rapidly-growing lifestyle sector, as global branded operators had mixed results in developing their own lifestyle brands. Whilst W Hotels, Andaz and Indigo gained varying degrees of traction, others have been slow to roll-out (Edition), or aborted (Missoni, Denizen). So, they turned to the alternative route of acquisition.
InterContinental Hotels (IHG) bought US hotel and restaurant brand Kimpton for US$430 million. For IHG, the value lies in the brand’s proven track record (lower risk) and growth potential (i.e., creates value). According CEO Richard Solomons, “Kimpton saw that it needed a scale player to take it to its next phase of growth”.
A key part of Accor’s corporate strategy is “to be a global leader in lifestyle hotels”. They adopted a two-pronged approach: acquisition, securing interests in Mama Shelter and 25hours (30% stake for €35 million); and in-house development, launching the brand JO&JOE.
So why do these creative geniuses “sell out” to the corporates? In the words of 25Hours co-founder Christoph Hoffmann: “Designing appealing hotels with exciting concepts is not enough. A country network with local experience and expertise is also needed.” To achieve scale in a rapidly-changing market, brands need the resources to grow quickly – that means people, infrastructure and finances.
Acquiring management is increasingly important to create value in new markets or new product segments. According to Accor’s CEO, Sebastien Bazin, the FRHI deal was all about building their capability in the luxury segment. “The deal allows us to strengthen our human capital with FRHI’s widely respected and talented global workforce which has a proven track record in operating and marketing luxury hotels,” he said. In other words, they had insufficient capability in-house and by buying in a successful operating platform, they significantly reduced the acquisition risk.
Achieving game-changing scale requires deep pockets and vision. Marriott did what few other companies were capable of doing and acquired Starwood for a cool US$13.6 billion in 2016. It is now the largest hotel company in the world by some margin, with 5,500 hotels, 1.1 million rooms and 30 brands. Proponents of the deal point to the fact that Marriott has scored a hat trick: they secured greater choice for guests, which should fuel loyalty; they have significantly increased bargaining power with corporate buyers, online travel agents (OTAs) and other distribution channels, which should lower the acquisition cost of business (and drive profits); and they have taken out one of their direct competitors in terms of product, loyalty program and brand power. They may have challenges, but the market has given its approval.
So what next? With the underlying fundamentals of the industry looking stable with moderate growth anticipated, 2017 looks set to be another active year. More strategic acquisitions are anticipated to “plug gaps” in product, market or management. Potential areas include:
- Resorts – leisure-driven operations will continue to attract suitors, given the positive long-term prospects for leisure travel. The Outrigger, Banyan Tree and Miraval deals were trailblazers.
- Regional players – “bolt-on” deals and/or strategic alliances will be sought by a range of regional and global players to strengthen distribution and bargaining power.
- Chinese investment – despite a noticeable tightening of overseas investment approvals, domestic players will continue to consolidate their overseas portfolios, acquiring expertise and distribution in key outbound markets. More domestic brands are anticipated to venture overseas, particularly in the Asia-Pacific region.
- Hotel alternatives – this covers short-term accommodation such as serviced apartments and home rentals. Given the explosive growth, disruption and fragmentation of this segment, consolidation is inevitable. Accor (who acquired Onefinestay for US$170 million) won’t be the only operator to have studied the home rental segment.
- Mega deals – trade is steady and many players have strong balance sheets, so 2017 may be a third year of large portfolio deals. Market chatter continues around Hyatt, IHG and Wyndham; Hilton and Accor have both restructured their owned real estate. Watch Accor too, whose approach to disruptors has been to acquire them; expect more of that.
- OTAs – Google has yet to enter fully into the fray and the effects of the Marriott/Starwood merger have yet to be seen. Change is inevitable. Will 2017 be the year of vertical integration between an OTA and a hotel company or another hybrid structure? Perhaps this will be where we see the mega-deals.
In a low-interest environment, with travel and tourism forecast to continue to grow faster than global GDP, there is no sign of this wave of consolidation abating.
To create sustainable value, hoteliers need loyal guests – that means providing places people want to stay, in locations people need to be, delighting people during their visit, and rewarding them for choosing you. Innovation and consolidation are critical to delivering this.
Katharine Le Quesne is a visiting lecturer at EHL. Katharine has 20 years’ experience advising hospitality investors and operators while working for Deloitte, Arthur Andersen and JLL. Later this year, she will be part of the team of EHL professors who will be teaching on the school’s new MBA in Hospitality program, which is scheduled to launch in September 2017.
First published in January 2017.