Financial experts analyze hotel consolidation
11 FEBRUARY 2016 8:10 AM
Experts on the 2016 Americas Lodging Investment Summit IREFAC panel say distribution challenges will continue to drive brand consolidation for hotels.
LOS ANGELES—Consolidation continues to be the hot-button topic for discussion within the hotel industry.
In the wake of planned mergers between Marriott International and Starwood Hotels & Resorts Worldwide, and AccorHotels and FRHI Holdings Limited, hoteliers want to make sense of what those deals mean and if more could be coming down the pike.
So panelists during a recent Industry Real Estate Finance Advisory Council panel at the 2016 Americas Lodging Investment Summit set to unpack those issues.
Breaking down Accor-FRHI
Jackson Hsieh, MD and vice chairman for real estate at Morgan Stanley, said he believes much of the movement toward brand consolidation has been driven by distribution issues.
“Everybody is facing the same issue,” Hsieh said. Online travel agencies “are taking an increasing part of the pie. So, if you have more brands, more distribution, more clients, I think that gives you a bigger seat at the table.”
Hsieh’s company is acting as financial advisers for FRHI throughout the process that leads to a planned merger with AccorHotels. Pressed by moderators for details on who was in on the bidding process, Hsieh wouldn’t budge. But he did admit Chinese capital didn’t play as big of a part in the process as he had originally expected it might.
“I’m not surprised by Accor being the winner given their lack of North American presence in upper upscale,” he said. “They knew (Fairmont) was a critical brand for what they wanted to do. They were a logical (buyer). We tried to look at Chinese buyers, but the problem was being certain where their money was. They had regulatory issues getting their cash out. It was challenging for us to really rely on them in the end.”
Because the Fairmont sale process was running concurrently with the Marriott/Starwood deal, Hsieh said he knew the latter would affect the former.
“We knew whoever didn’t win Starwood probably would want to do the Fairmont acquisition,” he said.
Hsieh said most of the major brand companies had interest in FRHI in one way or another, but he didn’t get the kind of interest he expected from some. He said they identified three major players going into the sale process that they expected to make a run at FRHI, but only one of those three ended up seriously competing to buy the company.
A look at Marriott-Starwood
Anthony Capuano, EVP and global chief development officer for Marriott International, gave a small glimpse into the thinking behind his company’s deal in progress with Starwood. He said gaining control of Starwood’s assets seemed appealing from the get-go, but the price tag made it unfeasible.
“At the outset, with the relative stock prices, the economics didn’t work for us,” Capuano said. “Toward the tail end of the process, the movement in stock price made it an attractive opportunity for us.”
Capuano said the deal took place after negotiating a new contract with Expedia, and he noted that timing wasn’t a coincidence.
“It was an important reminder for us about the rapid evolution of the distribution landscape and the importance of scale in the future,” Capuano said.
Hsieh said the Starwood-Marriott deal will go down as a landmark merger for the hotel industry.
“This is the real, true, first large-scale, multi-branded true merger,” he said. “This is a first.”
Panelists said the industry should brace for further consolidation in 2016 and beyond, as OTA pressures show no sign of going away.
Mark W. Elliott, president of Hodges Ward Elliott, said the fact that the hotel industry is made up of many small players, particularly in comparison to the OTAs, will fuel that fire.
“We still have a lot of different hotel brands, but if you look the OTAs, there’s two: Expedia and Priceline,” Elliott said. “It’s still a very fragmented market.”
Hsieh said ultimately he sees three big hotel brand companies emerging from the scrum, similar to the airlines.
The question that remains is which companies those will be.
“There are a lot of combinations that are out there,” he said. “Hyatt and (Intercontinental Hotels Group) on paper would be very interesting. They bring a lot to the table there.”
Michael Murphy, head of lodging and leisure capital for First Fidelity Companies, said there are two clear favorites among hotel companies today in the capital markets: Marriott and Hilton. He said today there is no clear third place, and that might drive some companies to consolidate to try to claim that mantle.
“I think it’s interesting to think about these combinations and what their ramifications are for the consumer market,” Murphy said. “But when you think about what makes them go, it’s the capital markets.”
Murphy did say, though, that he doesn’t foresee a wave of consolidation among REITs, which have been struggling on the stock markets but thriving in terms of operations.
“The whole category has been punished for some reason,” he said. “The returns are actually pretty outstanding.”
Hsieh said cash deals for REITs likely won’t happen, but he believes stock-for-stock transactions are still a possibility.
“We’ve seen them in other sectors—retail, multifamily and office,” he said.
He said the problem with REIT consolidation is they don’t realize the same kind of synergies that brand-based deals do and don’t impact things like distribution.