LONDON—The bustling environment of frequent mergers-and-acquisitions activity will soon settle down, according to sources close to the two largest consolidation deals completed in 2016.
An M&A slowdown might happen because it’s unlikely Marriott International’s acquisition of Starwood Hotels & Resorts—which closed on 23 September—will be replicated, sources said, although they added it would be a mistake to expect all activity to cease.
“Last year was a banner year,” said Timothy Lloyd-Hughes, vice chairman of European hotel, leisure and gaming investment banking at Deutsche Bank.
Attendees at the 26-27 September Hotel Investment in Europe Conference—also known as Hot.E—openly discussed the good and the bad of the Marriott/Starwood deal and AccorHotels’ acquisition of FRHI Holdings during a session titled “Hotel company M&A: Will the trend continue?”
He said investor pessimism could make further deals more difficult.
“(InterContinental Hotel Group’s) share price came off 5% (on 26 September) as Morgan Stanley has officially said this is the top of the cycle, (and) if you think where multiples and share prices were, at an all-time high at the end of 2015, then that was a pretty good time to do deals,” he said. “When that happens, the size of your company shrinks. Considerably smaller market cap.”
Lloyd-Hughes gave some background on what led to Marriott and Starwood coming together.
“Starwood? It goes back to when (former CEO Frits van Paasschen) was fired. … Starwood thought it was all tech, even as everyone around them was consolidating, so they did not take part in that,” Lloyd-Hughes said. “And when Starwood did come into play there was bid premium on top of that and all the share prices and multiples were high.”*
Lloyd-Hughes added that Starwood’s suitors before Marriott were pretty obvious.
“From what I understood, (Starwoods’ bidders were) Hyatt and three Chinese players,” he said. “Hyatt (had) preference to China, as only Hyatt could offer stock … (and) there’s always the problem as to if the Chinese will deliver, which they have but in this case did not.”
Lloyd-Hughes said the problem for Hyatt Hotels Corporation was company executives wanted to make an offer for Starwood but the Pritzker family—Hyatt’s founders and owners—were not willing to dilute the A/B share structure beyond a certain period.**
“The idea being that the Pritzkers would eventually give up on an A/B structure, but they did not blink,” Lloyd-Hughes said. “By the time (Marriott CEO Arne Sorenson) got the call, multiples had come down significantly. The fact the deal was accretive after year one, for them it was a beautiful thing.”***
“You have to make sure the operating platform is accretive. That is your business,” said Gaurav Bhushan, global chief development officer at AccorHotels, which acquired FRHI Holdings and its Fairmont, Raffles and Swissôtel flags in a deal that was approved by shareholders in July.
Calmer seas?
Bhushan said the industry sea change happened because of the growth of investment needed in digital.
Not all the major hotel entities have been either “dining or dinner,” the panelists said, but all have changed profoundly in recent years in terms of their ownership or what they own.
“The whole investment strategy is different in an asset-light business, but it has to make business sense in the eyes of the acquirer,” Bhushan said. “The (FRHI) deal makes us one of the top three players in terms of the luxury and upper-upscale segment. We thought we could pay a premium for (FRHI) for the synergies we could see and because we thought we could grow the business … we restructured the deal with majority stock, which comes with an element of pricing. It’s hard to compare one deal with another.”
Lloyd-Hughes said both the Marriott and AccorHotels deals made intrinsic sense.
“Marriott got massive scale at a decent price, and AccorHotels’ deal, at around 13 times (earnings before interest, tax, depreciation and amortization), by buying Fairmont, it got Raffles and Swissôtel for free,” Lloyd-Hughes said.****
The timing of both acquisitions was also perfect, Lloyd-Hughes said.
M&A activity might have come to a peak in 2015—when both deals were first announced—also because the large hotel companies continued on an asset-light stance, panelists said.
*Correction, 19 October 2016: A previous version of this story used an incorrect quote.
**Correction, 19 October 2016: A previous version of this story stated an inaccurate reason why Hyatt and the Pritzker family didn't make an offer for Starwood.
***Correction, 19 October 2016: A previous version of this story used an incorrect quote.
****Correction, 19 October 2016: A previous version of this story used an incorrect quote.