IHG’s Kimpton buy start of consolidation push?
IHG’s Kimpton buy start of consolidation push?
17 DECEMBER 2014 8:49 AM
While 2014 was the year of hotel acquisitions, 2015 likely will be the year for consolidation, sources said.
GLOBAL REPORT—2014 might have been the year of public-equity acquisition, but 2015 likely will be the year of hotel-company consolidation, sources said. 
Kicking off the New Year early was InterContinental Hotels Group’s $430-million buy of San Francisco-based Kimpton Hotels & Restaurants.
“There’s always consolidation of some kind that goes on in our industry, particularly when liquidity is high, cost of capital is low and the (United States) stock market is at new heights and looking for more,” Robert Hecker, managing director of the Asia Pacific for Horwath HTL, wrote in an email.
Elizabeth Winkle, MD of STR Global, sister company of HNN, said consolidation is the obvious next step in this hotel-industry cycle.
Several companies, in addition to IHG, already have stepped in that direction. Recent consolidation activity includes: 
  • Jurys Inn, the Irish hotel operator with 31 properties, might be considering a merger or sale valued at more than £700 million ($1.1 billion), it said in December;
  • The merger of TUI Travel into its parent company TUI AG, which sees a new share listing on the London Stock Exchange on Wednesday, is a €6.5-billion ($8.4-billion) piece of business but an entirely in-house deal. TUI Travel owns hotel brands TUI and Thomson, but hotels constitute a small part of the combined company’s business;
  • Shanghai Jin Jiang International Hotels Group announced in November it will pay €1.2 billion ($1.49 billion) for Louvre Hotels and its 1,100 hotels in 47 countries;
  • Accor in October acquired a 35% stake in lifestyle chain Mama Shelter; and
  • In July, Vantage Hospitality Group acquired the core brands (3 Palms Hotels & Resorts; America’s Best Inns & Suites; Country Hearth Inn & Suites; Jameson Inn; Jameson Suites, and inactive Signature Inn) of America’s Best Franchising in a deal that did not disclose financial details but included 225 properties.
“The one question remaining from an exit perspective will be initial public offerings. Values are so high … it is a good time to discharge assets,” Winkle said.
Do or die
Michael Widmann, managing partner at PKF Hotelexperts, said the hotel industry will see three different types of consolidation.
“The larger hotel groups have concluded they missed the lifestyle boat, so they’re desperately trying to get increased know-how to fill this gap. The (October 2014) Accor-Mama Shelter deal was indicative of this, not so much about gaining hotels but knowledge, and everyone has seen how boutique properties contribute to higher margins,” he said.
Hecker agreed on this first point. 
“The ‘boutique’ segment is definitely a major component of the industry now and growing, so all global hotel companies are considering their strategy for participating in the segment in one way or another, either by creating their own versions and/or acquiring ‘boutique’-focused companies,” he said via email. “Undoubtedly there will be more such acquisitions to come.”
The second type of consolidation, Widmann said, will be the “trend of larger groups swallowing up smaller groups. We’ve not seen many mega deals recently, but that will be the prevailing trend.” 
“Lastly, we’ll see the continued rise of Chinese hotel groups. Hotels are fine for them, whereas, perhaps, technology and defense would come with problems and questions. For China, hotel-chain acquisitions are double-edged, allowing them to get a toehold in international markets and buy brands they can bring back to China,” Widmann added.
Russell Kett, chairman of HVS London, said consolidation is about survival of the fittest.
“It’s quite simple, really. All the major hotel companies want to grow their businesses, both in terms of profitability and in physical terms, (that is) increasing the number of hotels in their chains. New owners (and) franchisees will not be attracted to join a declining brand,” Kett said.
“So hotel companies have to keep pushing the ‘expand’ button. Organic growth (one or two at a time) can only produce so much, so companies also need to look for opportunities to make quantum leaps, typically by buying other hotel companies and driving more value through economies of scale.
“The global hotel companies either have to acquire to keep growing or be prepared to be someone else’s target for acquisition. So the question is: Will you be dining? Or dinner?” Kett said.
Breaking down the Kimpton deal
Stating that it is difficult to generalize about consolidation, Richard Solomons, IHG’s CEO, told HNN that it is difficult for smaller companies to accomplish global growth, global customer flows and the necessity for digital investment.
Kimpton has done a brilliant job, but there is opportunity for scale, and consolidation in part derives from the demands from both guests and owners. IHG has 4,700 hotels, with 1,000 more in the pipeline, and can provide enormous growth. Of course, there are other companies that have that scale, too,” he added.
Kimpton has 62 management-contract hotels comprising approximately 11,300 rooms in 28 cities; a pipeline of 16 properties with approximately 3,000 rooms and constituting 27% of the overall portfolio; 1.6 million loyalty members; and 71 hotel restaurants and bars. IHG franchises, leases, manages or owns more than 4,700 hotels and 697,000 rooms in nearly 100 countries, with almost 1,200 hotels in its development pipeline. The chain’s IHG Rewards Club comprises more than 82 million members worldwide.
Kimpton was IHG’s first brand acquisition since the 2003 purchase of Candlewood Suites, Solomons said. 
David Loeb, senior hotel research analyst and managing director for R.W. Baird & Company, said the accelerant for consolidation is the need for brands to grow their global distribution. That can prove challenging for smaller companies such as Kimpton, which faced the challenge of stepping up the financial commitment for the infrastructure that a global platform requires.
“I’m speculating that Kimpton was at a spot where they could double down and grow the company, but it would cost a lot, or they could find a partner with the infrastructure and focus on growing the brand name,” Loeb said. “If they can keep the San Francisco operation and keep the bulk of the people and use (IHG’s) strength, then that’s great for them.”
Once tax implications are taken into consideration, Kimpton is valued approximately 15 times trailing (earnings before interest, tax, depreciation and amortization), Loeb said. 
LaSalle Hotel Properties and Pebblebrook Hotel Trust own 22 of the 62 hotels in Kimpton’s portfolio, he added, with each of those hotels having a termination agreement of some sort and more than half having contracts that are terminable at will.
“I’m sure InterContinental did their homework to underwrite the risk of those properties being terminated,” he said.
“We’ve talked to (Kimpton) owners; let’s leave it at that, and they were consulted, but I don’t think they had to give their approval,” Loeb said. “They didn’t have contractual rights to approve the sale.”
Loeb said he expected owners to take a wait-and-see approach as IHG’s integration plan unfolds.
IHG’s stock price (NYSE: IHG) increased 1.9% the day of its Kimpton announcement. Year to date, the company’s shares were up 5.8%. The Baird/STR Hotel Stock Index, meanwhile, was up 14.8% year to date. 
HNN’s Jeff Higley and Patrick Mayock contributed to this report.

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