Legal experts said merger activity should make hoteliers hyperaware of potential problems such as premerger collusion and areas of protection.
NEW YORK CITY—The hotel industry is in the midst of two megadeals that are expected to close in coming weeks that will reshape the landscape, and some experts say the industry’s recent appetite for mergers and acquisitions could complicate things from a legal perspective.
During the “Legal issues evolving out of the era of consolidation” panel at the 2016 NYU International Hospitality Industry Investment Conference, sources discussed the issues the industry faces with consolidation. While many are driven by Marriott International merging with Starwood Hotels & Resorts Worldwide and AccorHotels merging with FRHI Hotels & Resorts, other forms of industry consolidation are also playing a roll.
“What we’re seeing from our vantage point is an array of different types of (mergers) and acquisitions happening,” said Larry Kwon, managing director of investment bank Moelis & Company.
Panel moderator Rick Kirkbride, a partner with Paul Hastings, noted that branding companies like Marriott and AccorHotels will soon have a greater level of negotiating leverage with hotel owners.
Kwon said owners will have to shop around to counteract that.
“Owners always have some options,” he said. “The question is where you get the best value.”
Global anti-trust issues
While certain acquisitions might easily clear anti-trust reviews in countries like the United States, that doesn’t mean they won’t have issues in places with different rules and might be worried that the merged company holds too much share in individual markets or specialized areas.
“They look segment by segment in China,” said Terence Badour, EVP of law and administration for FRHI Hotels & Resorts. “They look at (where the companies) are and do a pretty thorough analysis. It’s very different than what you experience in Canada and the U.S. In Europe, they also look at segmentation.”
International regulatory issues
Sometimes buying a company from a different country will fundamentally shift what the target company can do based on the new region they are based in because of an individual country’s regulations.
Christopher Nowak, EVP and general counsel for Wyndham Hotel Group, said that needs to be factored in to the considerations before any possible acquisition.
“Sometimes a European company can do business with individuals that a U.S. business can’t,” Nowak said.
He said this is particularly an issue when dealing properties in China because they are often owned by the Chinese government and that can cause issues in other countries. He said his company also has to be careful about where the capital comes for some franchisees.
“We had a prospective franchisee owned by a weapons manufacturer,” Nowak said. “We couldn’t do that deal. You should involve counsel early on, so you don’t fall on your face.”
International acquisitions by U.S. companies are also subject to a review by the Committee on Foreign Investment in the U.S., pointed out Peter Benudiz, partner with Sidley Austin.
This can gum up the works if that committee deems that the deal will have national security implications.
“Their purpose in life is to clear any transactions from any foreign investor they classify as a potential security interest,” Benudiz said. “Chinese investors have been facing that quite a bit.”
Areas of protection
One of the first concerns to emerge following the Marriott-Starwood announcement was the possible implication for areas of protection built into specific deals, but Benudiz said he doesn’t expect that to be a problem for those companies in part because most contracts are built to be brand specific.
“Both Starwood and Marriott should be pretty well protected going forward,” Benudiz said, noting some cases filed opposing the merger on these grounds are unlikely to succeed.
He did say there could be “some exposure” due to the size of the transaction, but in a deal this size that is viewed by board members as an acceptable loss.
Similar to the areas of protection, issues with brand standards are only expected to crop up if brands themselves merge instead of the companies that own them. Badour said that’s the scenario Fairmont owners are facing with the AccorHotels deal.
“The brands are not changing,” he said. “They’re acquiring our three brands, and owners will still have those three flags.”
Avoiding premerger collusion
Hoteliers have to walk a tightrope as they work to close a merger, sources said, because they have to lay out the groundwork for two companies to become one while at the same time operate as competitors. That means they can’t share sensitive information like contract terms because that could be viewed as colluding.
Badour said that means premerger discussions should focus on larger strategy questions rather than the nuts and bolts.
“Getting a cooperative sense of spirit on both sides goes a long way preclosing and follows through post-closing,” he said.
Discloser and confidentiality
Mergers for public companies necessitate a certain amount information disclosure to the Securities and Exchange Commission in the U.S. or to the other company involved in the transaction. Badour said hoteliers need to be careful in those situations to not compromise confidential information owned by other parties.
“We’re always very concerned about disclosure of property information because that belongs to the owner,” he said.
Deal versus integration
Panelists urged companies approaching a merger or acquisition to form “integration teams” to help the transition, but warned that those teams can’t be discontinued from one stage of the process to another.
Nowak said companies will sometimes have one team to close the deal and another for integration, and this can be problematic without deal team members staying involved and communicating throughout.
“Often, the deal team walks away after the deal,” he said. “Things are lost from the negotiations if the transactional people don’t stay a part of the process at least a month or two after closing.”
When acquiring hotels with a unionized work force, or portfolios with both union and non-union hotels, hoteliers should be prepared to proceed with the deal as if their entire workforce is unionized, Kwon said.
“When you’re merging two businesses and one is a traditional union (workforce) and one isn’t, if you’re not building in union accretion, you’re screwing something up. … In those deals, we presume the lowest common denominator because they’ll find you,” he said.