LONDON—If the 7 October slump of the pound sterling against the U.S. dollar means United Kingdom hotels, portfolios, chains and firms are now considerably lower in value, there is no sign that a fire sale is in the works, according to sources. And the country’s hotel gem, InterContinental Hotels Group, is likely to be unaffected.
The pound sterling slumped dramatically, by approximately 6%, on 7 October, to $1.1841 against the U.S. dollar, in what some said was the “most aggressive move since the results of the Brexit vote emerged in June.” The pound sterling did move up before the end of that day, finishing at $1.24 against the dollar.
Owners and analysts have been quick to say exchange rates rarely top the list of negotiating tools, and the breadth of other moving parts in negotiations require buyers to have stories firmly in place in any proposed deal.
IHG has been subject to speculation of mergers-and-acquisitions activity in recent months, in light of moves by hotel firms of similar international caliber—Marriott International, Starwood Hotels & Resorts and AccorHotels.
Wouter Geerts, travel analyst at business consulting firm Euromonitor, said IHG likely will continue to be a key focus point for M&A speculation, but the company is strong and confident enough to ride out any storms.
“The extremely low pound is resulting in more travelers visiting the U.K., but it is unlikely to be a strong consideration for any takeover bid, as the acquisition process can take a long time—just look at the Marriott-Starwood merger—while exchange rates currently seem to fluctuate on a weekly basis,” Geerts said.
“The impact of the falling pound will definitely be more severe for IHG than its U.S.-based competitors, and it is likely that its growth forecasts will need to be adjusted accordingly,” he said. “The company, however, has shown its confidence in the overall hotel market and its … strength by investing heavily in updating its brands and introducing new brands targeting younger and health-conscious travelers.”
Edward Rohling, president and CEO of TRC Hotel Advisors, based in Paris, said “IHG’s global presence to some extent gives them a natural hedge.”
“I do not see any of the major chains looking at (the slump in the pound) as a crisis. They will look at it from the viewpoint that it might make more attractive some localized opportunities,” he said. “If potential buyers had most of the pieces in place for a buy and had been eyeing an asset or portfolio for some time, then perhaps now does mark as good a time as any to seize the market.”
Timothy Lloyd-Hughes, vice chairman of European hotel, leisure and gaming investment banking at Deutsche Bank, said two weeks ago—before the pound sterling’s latest slump—that there were very few public sector hotel concerns left in Europe and all were of interest to investors.
Speaking at the Hotel Investment in Europe conference in London, he said, “you have to assume IHG will be sold.”
Officials at IHG declined to comment before the company’s third-quarter trading update on 21 October. Instead, they referred to comments made by CEO Richard Solomons at an event in London on 8 July.
At that media event, Solomons said he did not think Brexit and its resultant currency slump would be a massive concern for IHG. “IHG reporting is in U.S. dollars, and the U.S. in absolute profit terms is the biggest market for us globally, and it will continue to be so,” he said.
Ownership view
Some hotel owners hinted that foreign buyers might have renewed interest in U.K. assets, but caution still very much plays a part in the market.
“While currency fluctuation is rarely the engine for transactions … we have seen it be a modest, qualitative positive for foreign capital acquiring U.K. hotel assets when they have also negotiated a reduction in pricing,” said Aaron Greenman, EVP of acquisitions and development, Europe, Middle East and Africa at hotel ownership and management firm Interstate Hotels & Resorts.
Keith Evans, VP of hotel acquisitions at Starwood Capital Europe Advisers, said recently that public market share prices had increased substantially at the same time as negative news was occurring, which might be an early indicator of renewed M&A activity.
But, he added, there are various ways to look at the current market.
“It’s about taking a view on your entry and exit point (for any asset),” he said. “Yes, it might be like-for-like cheaper vis-à-vis (foreign exchange), but then your underlying income will come in at the same ratio. What you buy might not be accretive unless the (foreign exchange market) fall is short term.”
Forex hedging curves and subsequent exposure to interest rates changes, he added, are considerations that might cause investors to pause.
Evans said another piece of the story is how the slump affects underlying operations.
“If forex goes down, it is cheaper for foreigners, and domestic travel will increase. We’ve already seen retail numbers go up in the U.K., but improved revenue to (earnings before interest, tax, depreciation and amortization) ratios will be offset through inflation of goods you need to import, which will especially noticeable for hotels in (food and beverage),” he said.
Chinese interest
Evans said one group of investors that might be more attracted to U.K. assets are those that own numerous parts of the booking process, since their savings would be exponentially greater.
Chinese companies such as Jin Jiang and HNA Tourism Group—which own hotel chains, tour companies and search and booking engines, among other components—are obvious examples, sources said.
Capital weight remains another major factor in M&A.
“It is relatively competitive out there, still a lot of money in the market looking for a place to go,” Evans said. “… I still see private equity actively buying and selling. Thinking in terms of the political context, it’s normal for people to be a little more careful, but whether than translates to lower transaction volumes remains to be seen.”
Nicola Lichtenberg, assistant VP, special property finance, hotel properties, at Germany-based Aareal Bank AG, said she had seen Asian investors become increasingly interested in the U.K.
“It is difficult to say what the attitude to the U.K. is,” she said. “We have brokered a few deals, transactions have completed, but we are a little more cautious. In the short term, the pound will definitely remain low, but one cannot say if that will last through the mid and long term, and that is what investors are wary of.”
One source added U.K. private equity might now prefer capital to sit with assets in continental Europe, rather than looking at a U.K. market that might hunker down.
“I’m more concerned with U.K. private equity funds looking at property acquisitions in continental Europe, despite a lot of uncertainty, indecisiveness and lack of clarity slowing down some processes. The market is making people rethink, sometimes overthink,” Rohling said.
“As far as the U.K. is concerned, obviously assets are on sale right now,” he added. “You can see how sensitive and on edge things are. (Prime Minister) Theresa May (on 2 October) stated Brexit would start in March, and that triggered this fall, but anyone who steps in now, now that we have this low price in the pound, might be in for a surprise as I don’t think anyone from the sale side will be automatically looking to jump. Any negotiations will be involved.”
Not sound as a pound
The consensus is the pound sterling is in for a rocky ride as conversation and uncertainty follow the U.K.’s 23 June decision, known as Brexit, to exit the European Union.
According to the Bank of England’s statistical database, the pound sterling’s exact 7 October conversion rate of $1.2465 was the currency’s lowest point at any time during the last 52 weeks. (The highest rate the pound has achieved in that time span was £1.548 against the U.S. dollar.)
The Financial Times reported the pound sterling had traded down “1.8% at $1.2381 in London (7 October) afternoon trading, well below the $1.26 levels it was holding at before the plunge. Against the euro, the pound was 2.1% weaker, with £0.9018 required to buy (one euro).”
The FT added the fall was the “biggest intraday drop against the dollar since (the pound sterling’s) 11.1% plunge on 24 June,” the day after the EU referendum in the U.K.
Ian Stewart, Deloitte’s chief economist, U.K., said the dramatic fall saw the pound sterling reach “its lowest level since May 1985.” But the multinational professional services firm’s weekly brief also speculated—as did many U.K. newspapers—the slump “could have been triggered by a mistaken ‘fat finger’ trade or a rogue automated algorithm.”
Sources said this slump of the pound is different from others in that previous slumps have been reactive in nature. The current slump has an uncertain timeline because Article 50 of the Lisbon Convention—which will start the process of the U.K. leaving the EU—has not been triggered yet. The U.K. will reportedly begin the official Brexit process in March.