A panel of Wall Street executives at the NYU International Hospitality Industry Investment Conference discussed the issues affecting the hotel industry and how they could come into play in further M&A activity.
NEW YORK—With all the speculation over consolidation in the U.S. hotel industry, executives from Wall Street shared their views on what’s going on in hospitality in a session at the NYU International Hospitality Industry Investment Conference.
The “Wall Street perspectives: Current and future consolidation” panelists weighed in on all the talk about mergers and acquisitions and why it doesn’t seem to be going beyond just talk.
All talk but little action
Michael Bluhm, managing director and global head of lodging and leisure at Morgan Stanley, said there’s been more dialogue about M&A activity today than he’s seen in past years and it will likely continue. Lodging stocks have been on a tear since the election, he said, and they’re trading above average multiples.
Tax reform would have a big impact on all M&A, he said, and it addresses reason one why there isn’t more activity right now, he said.
“People are waiting to see how it will play out in Washington,” he said.
In the real-estate-investment-trust world, there are a handful of groups and large-scale players jockeying for position, Bluhm said. They’re figuring out how to achieve that from strategic M&A, he added.
On the C-Corps side, when it comes to disruptors, scale matters, Bluhm said. Hilton and Marriott International are “smoking” everyone, he said, and franchisees are buying into the power of scale.
The industry saw a lot of consolidation over the last two years, said Drew Goldman, managing director and global head of real estate investment banking at Deutsche Bank Securities, citing the deals involving Starwood Hotels & Resorts Worldwide and Fairmont Hotels & Resorts.
On a corporate-to-corporate basis, there aren’t a lot of transactions still waiting to occur, he said. The larger public companies have picked up several brands, and there are probably a couple more rounds to go.
“The easy stuff has already occurred,” Goldman said. “With REITs, they’re not necessarily able to bring much synergy to their business. It’s on the corporate G&A side, not operations. That’s really tricky. When you have to pay a premium for something, you have to justify it. That doesn’t translate to higher share prices necessarily.”
RLJ and FelCor
There has been discussions of possible REIT mergers in the past, said Davin Thigpen, managing director of real estate and lodging investment banking at JP Morgan, but RLJ Lodging Trust and FelCor Lodging Trust would be the first where it actually happens. The issue in the past has been the math hasn’t worked out for the two parties, he said.
RLJ traded down immediately following the news, an indication the market hasn’t liked the acquisition, Thigpen said, but the company has since traded up. There were a number of privatizations during the years before the recession, he said. Activist investors are looking for more combinations for scale, but the math has to work for the combinations, and there aren’t a ton of G&A synergies.
It’s going to be interesting to see if this move is good or bad for M&A activity, said Naftali Holtz, VP and head of lodging and leisure investment banking at Goldman Sachs. The market isn’t necessarily buying into it, he said, citing the companies’ stocks at the time of the announcement. There’s not a lot of room for higher leverage on this route, he added.