EAST LANSING, Michigan—The recent wave of mergers and acquisitions in the hotel industry—most notably Marriott International’s pending purchase of Starwood Hotels & Resorts Worldwide—could signal a new round of deals, according to executives during a recent panel at the annual meeting of the Michigan State University Real Estate Investment Management Advisory Council.
“In the past three years, we’ve had a huge boom in (mergers and acquisitions) in all industries, and from my perspective it appears the hotel industry will be part of this whole merger wave,” said Mark Johnson, professor of practice of finance in the Eli Broad College of Business at Michigan State. “It’s part of a broad globalization view of things; everyone is trying to gather expertise from others and establish more global presences.”
What kinds of companies are ripe for acquisition in the hotel sector was a topic of debate among the panelists. They agreed more M&A activity is likely, but they didn’t agree on which companies would be buyers and which would look to be acquired.
The fluctuating oil markets might drive some transactions, said Ryan Meliker, managing director and senior real estate investment trust and lodging analyst at Canaccord Genuity. He cited AccorHotels’ proposed acquisition of FRHI Holdings Limited as an example. FRHI operates the Fairmont, Raffles and Swissôtel brands.
“That deal isn’t indicative of a new trend because (FRHI) was held primarily by Middle Eastern sovereign capital,” Meliker said. “With what has happened in the past two years regarding the price of oil has affected their main reserves. And as their reserves go down they’re looking to liquidate some of their assets to build reserves back up. That trend continues to unfold, but it isn’t necessarily more indicative of additional brand companies being sold.”
Meliker also viewed InterContinental Hotels Group’s purchase of Kimpton Hotels & Restaurants as a possible harbinger of additional transaction activity.
“Kimpton was kind of an incubator company, and we might see more startup companies in which the principals are looking to exit the business,” Meliker said. “Going forward, however, IHG is less likely to be an acquiring company since (CEO) Richard Solomons is based in London and likes dealing with (United Kingdom) investors, rather than with investors he doesn’t know.”
John Keeling, EVP of Valencia Group, said Hyatt Hotels Corporation is another candidate to engage in M&A. Hyatt was among the bidders for Starwood before Marriott emerged as the eventual winner.
“Hyatt is the small kid on the block, but they have ambitions to be bigger,” Keeling said. “They may not go out and shoot any elephants, but they might shoot some wild boar. There might be other smaller companies that become available, and Hyatt will be very aggressive in trying to find ways to increase their presence and portfolio.”
Meliker disagreed, saying Hyatt’s ownership structure could discourage some types of transactions by the company.
“Hyatt is a private company in public-company clothing due to its dual-class share structure,” Meliker said. “The Pritzker family wants to maintain control of the company, so even when the company was bidding for Starwood, it was only willing to give shareholders voting rights after they held shares for a minimum of four years. If the deal had been consummated, Starwood shareholders would have had to hold their shares for four years. That’s not very attractive.”
Fred Kleisner, a member of the Caesars Entertainment board of directors and an independent member of the Aimbridge Hospitality board of managers, said he sees a scenario in which brand companies seek to buy management companies.
“These huge brand entities are just about done going asset-light and management-light, so I believe there will be more small deals in which they acquire management companies to create larger and larger management entities that carry the full faith of these franchisors behind them,” he said.
Winners and losers
The panel discussion was held less than 12 hours after Anbang Insurance Group announced it was rescinding its offer to buy Starwood, clearing the way for Marriott. Shareholders from Marriott and Starwood approved the merger on 8 April. As a result, much of the conversation centered on the particulars of the deal and who would emerge as winners or losers following the sale’s close.
“It’s clearly a buyer’s deal. The licensees won’t benefit from it,” said Chuck Pinkowski, founder of Pinkowski & Company. “The one thing it might do for licensees is streamline or consolidate the (development) pipeline. We’ve worked with many clients since the (merger) first came up who seemed to be paralyzed to making development decisions, particularly on the Starwood side, because they weren’t sure how this deal was going to be finalized.”
Keeling of Valencia Group said the merger puts the rest of the industry at a disadvantage.
“Any industry would be a loser when it is facing the kind of behemoth this new company will be with its ability to control most every market,” Keeling said. “And you would think the franchisees would be winners because they benefit from a new frequent traveler program and all the synergies the deal creates. In reality, though, those synergies are all on the corporate side.”
Meliker argued the combined company will provide several benefits for owners. One is its ability to negotiate more favorable commission rates from online travel agencies. Also, the new Marriott/Starwood combination will gain a strong advantage in the business travel market, he said.
“At the end of this merger, Marriott and Starwood will have 48% of all full-service hotel rooms in the United States,” he said. “The bread and butter of the hotel business are business travelers: They pay higher rates, and they spend more money out of the room. If you can grow your market share in business travel, where one plus one can equal three or even two and a half, you’re going to take market share away from Hilton, Hyatt and IHG.”
- The latest on the merger: “Sorenson talks state of Marriott, future of Starwood.”
The brand lineup
Another topic the panel tackled was what happens to the 30 brands under the new company’s umbrella. Starwood’s Sheraton brand is one that might be in play, the panelists said.
“For example, what are the distinguishing differences between Sheraton and (Marriott’s) Renaissance?” Kleisner said. “Sheraton has never defined itself, whereas Renaissance by comparison has better consistency and greater distinguishing aspects than we would find today in what (Sheraton founder) Ernest Henderson started so many years ago.”
Meliker said Sheraton is the “enigma” that Marriott will probably struggle with to figure out its positioning in the marketplace.
“I think you’re going to see Sheraton evolve into two brands: everything in the current Sheraton Grand collection is going to become just Sheratons, and what doesn’t fit into that high quality is going to get converted into a Delta Hotel,” Meliker said. “By doing so, Marriott can make Delta into a real brand with real market share in the U.S. in a relatively short order. It won’t happen overnight; it’s going to take time for contracts to roll over. But Delta will become the conversion brand for Marriott similar to what Hilton has done with DoubleTree.”