REPORT FROM THE U.K.—Investors and consultants alike believe the United Kingdom´s mid-market is ideally positioned for consolidation despite financing hurdles that are slowing down movement to that effect.
“There are very many hotels in that middle market that don’t have a strong brand, and that’s where I think they are particularly ripe for being pulled together and given a stronger identity,” said Russell Kett, managing director of global hotel valuation and consulting business HVS.
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Russell Kett HVS |
The market is filled with “serious,” cash-heavy investors who are evaluating opportunities, he added.
“The strategy they are looking at is, ‘Let’s buy for cash, let’s weed out what we can’t fit into our branding proposition, and let’s move ahead with restructuring the various hotels into a number of groups and brands, invest where required and re-launch them with the view to refinancing once the debt markets are restored to favor.”
Consolidation would help strengthen the hotel sector in general, according to Josh Wyatt, investment director of hospitality and leisure for Patron Capital.
“Our macro view of the U.K. mid-market sector is that consolidation, and rationalization—in other words, the removal of ill-advised hotel supply—needs to happen to allow the sector to repair and re-grow itself for the longer term.”
“Consolidation in the U.K. mid-market hotel sector should, in theory, lead to a rationalization of product whereby some product will drop out of the supply footprint, others will be repositioned to a more appropriate offering to meet specific micro demand,” he added.
Additionally, Wyatt said new owners would bring with them new capital to refurbish tired assets that have seen little capital expenditures during the past six years.
“This refreshed product offering should in theory benefit the end consumer, leading to profit growth,” he said.
STR Global’s year-to-date figures through September for the U.K. upscale, upper-midscale and midscale sectors revealed occupancy rates to be slightly up by 0.9% to 72.2%, average daily rate to be up by 3.2% to £74.03 ($117.47) and revenue per available room to be up by 4.1% to £53.43 ($83.78). STR Global is the sister company of HotelNewsNow.com.
Potential players
Kett cited several groups on the market that might befit investment with a view to consolidate.
“(Principal Hayley Group) has now been put up for sale, with a price tag of £500 million ($799 million). The group could be acquired by a private equity company that would use it as a consolidation vehicle,” he said.
De Vere Hotels, Venues and Village Urban Resorts is another candidate, as executives work to sell off non-core hotels and revamp the Village Hotels chain with a view to selling off the business in two to three years, Kett said. “The group also is investing £4 million to £5 million ($6 million to $8 million) in the Grand Hotel in Brighton, again with a view to selling.”
Kett added: “QHotels is selling six of its smaller hotels with a view to refinancing in the near future, and the heavily indebted Jurys Inn is about to be sold to a private equity backer.”
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Wyn Ellis Numis Securities |
A few of the major global hotel chains could also enter the mix, according to Wyn Ellis, director, equity research of travel and leisure for analyst Numis Securities.
In May, he speculated major consolidation in the market, suggesting InterContinental Hotels Group might be acquired by Marriott International. Despite challenges, Ellis maintains a deal is still possible.
“In the U.K., there remains a lot of uncertainty on the economic front and that is probably holding the consolidation process up, but there remains potential for corporate action especially in the mid-market segment in my opinion,” he said. “The issue other than economic uncertainty is availability of finance, especially given that a number of the mid-market operators are already highly leveraged.”
The financing slog
Lending is probably two years away from returning to some sense of normalcy—and acquisition or merger activity—to market, Kett said.
A handful of transactions already have occurred. Kett pointed to the purchase of Jarvis Hotels and the creation of Jupiter Hotels, a joint venture between institutional investor Patron Capital and West Register, part of the global restructuring group of RBS.
“It could well be that Patron Capital and people like them could bring together more than one group, weed out the ones that don’t fit and aggregate the ones that do,” he said.
The deal “was one of the first examples of a construction solution to the distress that U.K. hotel companies are facing today,” said Patron Capital’s Wyatt.
“With respect to Jarvis, the company encountered a host of issues ranging from capital structure imbalance, an underperforming franchise arrangement and a lack of investment in the physical product,” he added. “To fix these issues and to achieve proper value for the company, the senior lenders sought a more proactive workout solution rather than simply auctioning off the assets under an administration, which would likely have led to significant value destruction for the lenders. Accordingly, Patron and West Register partnered together, whereby West Register retained a 50% stake in the business thus allowing RBS to see a future value uplift.”
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Josh Wyatt Patron Capital |
However, deal activity largely has been down throughout the U.K.
HVS’s latest hotel transaction figures, released at the end of September, show investment in both single assets and hotel portfolios during 2012 has been significantly down compared with 2011 levels. The first eight months of 2012 saw hotel investment activity in Europe total around €3.5 billion ($4.5 billion ), a 16% decline on the same period in 2011.
As in 2011, the majority of investment has been in the U.K., where volume reached more than €1 billion ($1.3 billion), 46% of overall single-asset investment volume.
A total of nine portfolio transactions, involving 29 hotels, took place in the first eight months of 2012, reaching a volume of €1.5 billion ($1.9 billion). This represents a 22% decrease compared with the same period in 2011.
Kett said financing ultimately might come from nontraditional sources.
“There’s a lot equity that sits in the Far East or Middle East, and therefore, is not necessarily attracted to mid-market hotels in the U.K. But there are funds out there that could buy on full-equity basis with a view to refinancing,” he said.
He added that new types of lenders might inject further potential.
“There are certain other financial players who are looking to get into the debt market—insurance companies, for example—who are looking at getting more involved in the financing of deals. This sort of investor might help replace the debt market provider with a different type of player.”
The demand is clearly there, said Wyatt, who added that Patron Capital fully expects transactions and consolidation to increase.
“The will of the banks and existing sponsors is not quite in synchronicity. That said, we believe that over the next 24 months, there will be two to three examples of large-scale deals that will be powerful examples of consolidation or rationalization,” he said.
“There is a pricing mismatch at present. Once prices adjust to a level whereby new equity is comfortable with entry dynamics, there should be greater flow of printed transactions … Additionally, we remain optimistic that additional opportunities will present themselves as more assets or companies come to market,” Wyatt added. While “challenging, we are long-term bullish on the sector.”