M&A climate favorable for good third-party managers
M&A climate favorable for good third-party managers
16 FEBRUARY 2017 9:19 AM

As brand companies grow away from management activity and third-party managers get more sophisticated, opportunities will grow exponentially, according to CEOs of several established third-party management companies. 

LOS ANGELES—As the global hotel industry gets simultaneously larger through unit growth, and smaller through corporate merger-and-acquisition activity, the role strong third-party management companies play is critical.

Speakers at the Americas Lodging Investment Summit emphasized how important established, institutional-quality third-party managers are during this period due to what they can bring to the table in terms of operational expertise, capital and more.

Simon Turner, former president of global development for Starwood Hotels & Resorts Worldwide, moderated a “Boardroom Broadcast” panel on the topic of third-party management. The panel included CEOs from Davidson Hotels & Resorts, Benchmark, Crescent Hotels & Resorts and Aimbridge Hospitality. Turner also shared his views with HNN in a separate video interview.

Third-party managers and M&A

A hot topic during the panel discussion was the impact that industry megamergers—like Marriott International’s acquisition of Starwood Hotels & Resorts Worldwide—have on third-party managers.

“The consolidation in branding has been … in many ways terrific,” said John Belden, president and CEO of Davidson Hotels & Resorts. The big companies like Hilton and Marriott International “both understand what needs to be done in terms of creating the right leverage and balance in the industry. So to be able to take back some of the control of our inventory and pricing … and a lot of commissions” is a good thing. (See video above for more from Belden on the topic.)

Michael George, president and CEO of Crescent Hotels & Resorts; and Dave Johnson, president and CEO of Aimbridge Hospitality, agreed brand company M&A is positive for the overall industry and for third-party management companies.

“There’s going to be more—there’s a couple keyed up as we speak—and that’s good for the industry. We need brands as partners,” George said.

Johnson added that brands are laser-focused on growth.

“The bigger you are, the bigger your stick,” he said, referring to leverage, particularly against potential disruptors. “I think (M&A on the brand level) is very healthy for our industry.” (See video above for more from Johnson on the topic.)

Why investment helps
One way third-party management companies have grown their clout is by focusing more on what they do best and investing money in that.

For Aimbridge, Johnson said, investment in technology has resulted in a more mature, nimble management platform that’s able to handle what the brands throw their way.

As Aimbridge grew through acquisitions, the company had to mobilize its tech strategy, he said.

“We all want the best-in-class revenue management technology,” he said. “And we have to continue to invest in that space in order to stay current.”

Johnson said his company is focusing its 2017 tech spending, keying in on more and better data aggregation and predictive technology.

At Crescent, George said, refining the company business model and investment strategy helped it evolve.

“I worry about how we ensure we can improve upon our business model continuously,” he said. “There is ferocious competition out there. There are no barriers to entry to the business model, so we worked hard to clearly articulate what makes us different.”

George said that for Crescent, that meant evolving through years of change that included its 2006 relaunch, in alignment with Allied Capital and The LCP Group, to be “very active in acquisition.”

“We rode that bus hard for six years, but I’d be the first to tell you it changed the company, and I don’t believe in a positive way, from an operator and culture perspective,” he said.

He said the company’s eventual shift away from that model helped it focus on defining its strengths as a big player in third-party management.

“Here we are now, high quality and unconflicted,” he said. “I’m not saying one model was better than the others, but our model needed to shift. Now we’re different. We’re focused on U.S. and Canada only, upper upscale and luxury hotels, full-service, both independent and hard brands and soft brands. We needed to clean up our model if we really wanted to move ahead.”

The future of third-party

Sophisticated third-party management companies stand to do well in a future characterized by consolidation, the speakers said. Not only will they step up to fill the gaps as brands get further away from management functions, they also will strengthen through their own M&A activity.

Alex Cabañas, CEO of Benchmark, pointed to his company’s merger with Gemstone Hotels & Resorts last year as an indicator of the growing strength of all types of third-party management companies.

“Every single one of us has been involved in this consolidation world in one form or another, with equity coming into the business, which is phenomenal for our industry. And we’re all getting in conversations about it,” Cabañas said.

He said the merger with Gemstone was a good fit because both companies had been looking at “alternatives and strategic options” for growth, and company executives realized they would be stronger together.

“The reason it worked was because of the people and culture and alignment,” he said.

Johnson and Turner both predicted the industry will see more M&A activity among third-party management companies, as brand companies grow and get further away from management.

“If you think about it, 20 years ago brands managed the majority of their assets,” Johnson said. “Now I see the day where brands won’t manage anything. It’s not their core business. We’re seeing higher quality talent in the third-party world. I don’t see consolidation slowing down, either in the brand or third-party space.”

Turner also pointed out that beyond merging, opportunities continue to exist for U.S. third-party management companies to grow outside U.S. borders.

“As you move outside the United States, for any of the brand companies, they’re going to be willing to franchise, but only if (they) feel comfortable trusting their brand to a third-party operator who is not going to denigrate the brand in any way,” Turner said.

“It may be an opportunity, candidly, for (the big third-party management companies) as they grow to 500 hotels in the U.S. … to look beyond (the U.S.) and say, there’s a big growth market out there in franchising. They can partner with the brands, all of whom are becoming more and more global.” (See video above for more from Turner on the topic.)

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