NEW YORK CITY—The opportunity to add iconic luxury brands Fairmont, Raffles and Swissôtel was simply too outstanding to pass up, AccorHotels Chairman and CEO Sébastien Bazin told analysts Wednesday during a conference call in New York.
The call came a few hours after Paris-based AccorHotels announced it had agreed to acquire FRHI Holdings Limited for a total consideration of approximately $2.8 billion from Qatar Investment Authority, Kingdom Holding Company of Saudi Arabia and Oxford Properties, an Ontario Municipal Employees Retirement System company.
The deal, which is still subject to regulatory and shareholder approvals and expected to close during the second quarter of 2016, will be funded with $840 million in cash and an issuance of 46.7 million new Accor shares (representing about $2 billion), according to an investor presentation. Qatar Investment Authority and Kingdom Holding Company of Saudi Arabia are to become major shareholders, with 10.5% and 5.8% of the share capital respectively, according to a news release.
“It is another step forward for AccorHotels on its way to become, as you remember me saying a couple of years ago, the best hotel operator and the best performing,” Bazin said.
“We keep transforming HotelInvest according to plan to make it the largest and best-performing hotel real estate investor in Europe,” he added, speaking of AccorHotels’ ownership division. AccorHotels also operates and franchises hotels under its HotelServices wing.
It’s not the first large-scale portfolio acquisition executives at AccorHotels have mulled—nor will it be the last. During the call, Bazin highlighted three key reasons why his team pulled the trigger.
1. A leap forward in luxury
Fairmont, Raffles and Swissôtel represent an irreplaceable luxury presence that will give AccorHotels instant clout at the high end of the market, Bazin said.
Raffles’ history extends 128 years, while Fairmont’s goes back 108 years. (Marriott International’s The Ritz-Carlton is the only other luxury brand 100 years or older, Bazin said.)
The three brands are so high end that there is little overlap with AccorHotels’ other upper-tier brands, which include Sofitel Legend, So Sofitel, Sofitel Hotels & Resorts, MGallery, Pullman Hotels & Resorts, The Sebel and Grand Mercure, the CEO said.
Still, Bazin said the AccorHotels and FRHI teams would meet to discuss where, if at all, there existed overlap.
“We will indeed be talking with the Fairmont Raffles current management team on trying to assess on how complementary are those brands in which geography, for which clients, and will be making obvious decision on enhancing the portfolio for better margins for the owners and better facilities for the clients. But it is yet to be discussed.”
Approximately 35% of HotelServices revenues will now come from the luxury and upscale sectors, which creates much better balance in the portfolio, Bazin added.
2. Better exposure, particularly in the U.S.
AccorHotels’ footprint in the U.S., as well as the entire North American continent, has been almost non-existent since the company disposed of brands Motel 6 and Studio 6 in May 2012.
The FRHI acquisition will change that, Bazin said.
“This will give AccorHotels a much higher visibility in North America, specifically with the loyalty program gathering 3 million high-end members, predominately U.S.-based,” he said.
The deal would add 115 hotels and 43,000 rooms spread among the Fairmont, Raffles and Swissôtel brands. An additional 40 hotels and 13,000 rooms are in the pipeline, all of which are expected to open by 2018, Bazin said.
AccorHotels had 3,815 hotels and 500,768 rooms as of the most recent earnings period. After absorbing FRHI’s existing portfolio, AccorHotels (at 543,366 rooms) would surpass Choice Hotels International (504,357 rooms) as the No. 6 largest hotel company by room count in the world.
The new brands also would beget accelerated growth in the future.
“This would also create many more opportunities for growth, and we plan to speed up expansion in the luxury segment thanks to a wider range of brands available,” Bazin said.
3. Synergies of scale
As margins continue to erode in a more competitive digital landscape, Bazin said consolidation is one of the best ways to yield cost-saving synergies.
AccorHotels executives expect to reap them by pulling three key levers: hotel profit-and-loss statement maximization, marketing and distribution efficiency, and support costs optimization. The result is €65 million ($71.2 million) in total savings at an EBITDA level.
(There is a €120-million, or $131-million, implementation cost. Total synergies will be realized within three years, Bazin said.)
A more tangible example of these economies of scale can be felt with online travel agencies. While he declined to disclose specifics, Bazin said most hotel companies pay OTAs commissions of 15% to 20%.
“Accor’s contract is much lower than the one today being given to Fairmont (and) Raffles. By integrating those brands into our umbrella, (it’s) likely they will benefit from the Accor contractual rate,” he said.