Comparing the Marriott and Accor deals
17 DECEMBER 2015 9:25 AM
The same list of motivators spurred Marriott International’s planned acquisition of Starwood Hotels & Resorts Worldwide as AccorHotels’ planned merger with FRHI Holdings Limited, but the deals come with different deal structures.
GLOBAL REPORT—Similar motivations drove both Marriott International and AccorHotels in their recent headline-grabbing acquisitions announcements, but analysts who cover those companies say the deal structures differ.
On 9 December, AccorHotels agreed to pay $840 million in cash and 46.7 million new shares valued at roughly $2 billion for FRHI Holdings Limited and its brands. On 16 November, Marriott announced it will pay $12.2 billion, mostly in the form of stock, to acquire Starwood Hotels & Resorts Worldwide and bring its brand portfolio to 30.
Of the two companies, AccorHotels will be taking a bigger gamble with its plans to buy FRHI, according to C. Patrick Scholes, managing director of gaming and lodging and leisure equity research for SunTrust Robinson Humphrey.
Scholes views Marriott’s planned purchase of Starwood as more favorable simply because of the structure of the deal.
“Accor took on some debt,” Scholes said. “I think that’s the big differentiator.”
Scholes said it’s always a risky play to take on debt in big acquisitions in the latter part of the cycle, which happened with disastrous consequences in the mid-2000s. But even though he believes Accor’s purchase carries more risk, he doesn’t think the company went overboard in that regard.
“Both deals were mostly done with liquidity,” he said. “If they were done with more debt, it would’ve been very bad.”
The general consensus is that both deals make sense, but Marriott is getting a deal in its planned purchase while Accor will be paying full price.
“Part of it is the multiples the two companies are paying,” said Michael Bellisario, VP and senior research associate for Robert W. Baird & Company. Accor’s “is obviously higher,” he said.
He said that’s one big reason why Marriott seemingly came out of nowhere to close a deal with Starwood. After originally writing off the possibility of buying Starwood, Marriott officials saw a deal become more attractive as both stocks and the purchase price fell.
Bellisario said the deal grew more accretive, and “20% more attractive” from the point that Starwood officials announced their strategic review to the day the deal was announced.
Despite the relative price, analysts who cover Accor praised the structure of the company’s FRHI deal. André Juillard, head of travel and leisure sector research for Kepler Cheuvreux, commended it for bringing Qatar Investment Authority and Kingdom Holding Company on as major shareholders.
M&A a fit for the cycle
Bellisario said Accor’s planned purchase of FRHI and Marriott’s deal to buy Starwood fit into a rash of mergers in the larger economy.
“If you step back and looked at the economy from the 30,000- to 40,000-foot view, you see there’s tons of (mergers and acquisitions) going on,” Bellisario said. “It seems like there’s a couple every week for the past three, four, five months.”
Scholes said that’s a function of investors’ desire for continued growth.
“We’re at the point in the cycle where this is what happens,” Scholes said. “Growth rates are slowing, and Wall Street wants growth.”
Scholes said lagging hotel stocks have been a sign that investors have been more aware of where the industry is headed than those more directly involved in it.
“Things are decelerating at a property level and stock performance so far this year has anticipated that,” he said. “Investors have been more in tune with trends than management teams, surprisingly.”
Bellisario said we can expect to see more big acquisitions as hotel companies see the benefits of greater size and as they seek to give their numbers an artificial boost.
“Organic growth is still positive, but it’s not growing as fast,” he said. “To continue to feed that growth machine (investors seek), companies will turn to external growth to jump-start that. It’s the natural progression of the cycle.”
Additionally, analysts agreed that distribution pressures and consolidation among online travel agencies were strong motivators for both Marriott and Accor in their respective deals.
Juillard said that OTA pressures are particularly an issue in Europe.
“When you look at the market share (for OTAs) in the U.S., it’s about 10%, which is reasonable,” Juillard said. “In Europe, we’re closer to 20%.”
He said hotel companies overall are encouraged to acquire other companies to boost their own supply and counteract the power of the OTAs, but he did note that is “part of but not all” of their motivation to merge.
Bellisario said the pricing transparency for consumers, driven by the OTAs and sharing-economy services like Airbnb, are making things more difficult for hoteliers to drive bookings.
“The advantage is really with the customer, and customer acquisition costs from a brand perspective are very high,” he said. “By consolidating, they are in effect trying to reduce those costs by having a bigger platform with more loyalty members and more marketing power. They can also negotiate lower costs with the OTAs.”