CHICAGO—Hyatt Hotels Corporation has followed up on its promise to use acquisitions to fuel the growth of its fee-based franchise and management business with the announcement Monday morning of a deal to buy Two Roads Hospitality.
Hyatt officials announced the deal in a news release, noting there is a base purchase price of $480 million but the ultimate price tag could balloon up to $600 million total based on “the outcome of certain terms to be individually defined after closing.” Hyatt projects total purchase price to “reflect an (earnings before interest, taxes, depreciation and amortization) multiple of approximately 12 to 13 times stabilized 2021 earnings, which Hyatt considers the best indicator of valuation based on anticipated synergies and growth.”
The deal is expected to close by the end of 2018.
Two Roads is currently owned by Lowe and Geolo Capital,* a private equity investment firm owned by the family of John A. Pritzker, whose father, John Pritzker, founded Hyatt. In a separate news release related to the deal, John A. Pritzker said he believes “Hyatt would be the best steward to Two Roads and its managed properties.”
Geolo is also the largest owner of Hyatt-managed hotels.
Hyatt declined a request for an interview with executives for this story. In the news release, the company stated more information will be provided during its third-quarter earnings call with analysts. Two Roads Hospitality officials did not respond to a request for comment.
Hyatt officials have been open about their intention to be actively pursuing acquisitions in connection with a $1.5-billion sell-down in owned real estate, which was kick-started earlier in the year with a $1-billion portfolio sale to Host Hotels & Resorts.
When asked how much of that pool of capital remains following the Two Roads deal, Stephanie Lerdall, senior manager for global corporate communications for Hyatt, said “given our multiple funding sources, we’re not in a position to say. But we do have plenty of liquidity to support the acquisition.”
Two Roads, which was formed in 2016 when Destination Hotels and Commune Hotels & Resorts merged, currently manages 85 lifestyle properties across eight countries.
In the news release announcing the deal, Hyatt President and CEO Mark Hoplamazian said the acquisition brings several benefits to his company.
“Two Roads’ passionate team members, strong brands, global footprint and robust development pipeline will expand our lifestyle offerings and grow Hyatt’s brand presence in more places where our guests and World of Hyatt members want to travel,” Hoplamazian said in the release. “Importantly, combining Two Roads’ meaningful brand presence and development plans in Asia with Hyatt’s already strong position in this region will allow us to accelerate expansion in this critically important and fast-growing part of the world.”
Two Roads CEO Jamie Sabatier also touted the deal in the announcement, noting Hyatt’s larger scale will bring immediate benefits to the Two Roads portfolio.
“Hyatt is an ideal home for us as we share many values and a deep commitment to thoughtful growth and creating compelling experiences for our guests,” he said. “Hyatt’s unique position in the marketplace brings with it the powerful benefit of global scale while maintaining meaningful personal relationships with team members, guests and owners.”
Hyatt will create a dedicated lifestyle division once the deal closes.
Deal reaction
Rich Hightower, managing director for equity research at Evercore ISI, said there are several questions that remain in relation to the acquisition, and likely the largest among them will be the reaction from the ownership community.
“I can tell you that the (real estate investment trusts) are not so excited generally about what was previously a small independent manager being folded into a much larger corporate entity,” he said.
He noted that InterContinental Hotels Group’s acquisition of Kimpton Hotels & Restaurants was an example of such a deal going “disastrously.”
“I’m not saying that will be the playbook here, but that’s the worst case that can happen if (the deal) is not structured properly,” he said. “I’m not sure what the situation is yet, but they’ll have to let the Two Roads guys operate more or less as they have in the past; otherwise, there could be negative consequences. But this is all preliminary.”
He noted the figures provided by Hyatt are a projected EBITDA multiple based on earnings in three years, and “a lot can happen in three years.”
He said he spoke to two REITs that own Two Roads properties, and they’re engaging in a “property-by-property, market-by-market analysis” of the deal before determining how they move forward.
“All of these management contracts (for Two Roads) are cancelable at will, so depending on how that relationship plays out going forward, the fee income that Hyatt believes they’re acquiring may or may not pan out as expected,” he said.
Active buyer
Over the past few years, Hyatt has been “involved in a lot of M&A processes,” Hightower said, noting that “some have played out in their favor and some have not.”
The company was successful in acquiring two wellness-related companies in 2017, with the purchases of the Miraval resort and spa brand and the Exhale standalone spa brand. The company also made an investment in the Oasis home-sharing platform, but since admitted Oasis has underperformed expectations, resulting in Hyatt selling off its stake.
Hyatt has also swung and missed on some other potential acquisitions, most recently a short-lived but public pursuit of NH Hotels and before that an unsuccessful bid for Starwood Hotels & Resorts Worldwide.
Throughout the process, Hoplmazian has noted that acquisitions will center on furthering the company’s core mission of catering to high-end travelers.
*Correction, 9 October 2018: A previous version of this story incorrectly stated Two Road Hospitality’s existing ownership structure.