Heir Apparent - Investment Outlook - September 1999
Canada's Canadian Pacific Hotels hopes to leverage three strong deals into a platform for global growth.
By Staff -- Hotels, 8/31/1999 11:00:00 PM
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| Chris J. Cahill (right), president and COO of Canadian Pacific Hotels & Resorts will focus on building the Fairmont brand in Canada and the Caribbean while Edward Mace, president and CEO of the U.S. and Mexico division, will oversee activity in the United States and Mexico. North America's key gateways are the initial targets. Though 55 to 60 hotels would give CP a well-distributed portfolio, Cahill stresses that it is the right locations rather than the right numbers that will determine when Fairmont reaches critical mass. |
Toronto-based Canadian Pacific Hotels (CPH) has done three deals--three very good deals--since May 1998. The question now is: Where does CPH go from here?
"Is CPH really looking to be a Marriott or a Hilton or a Hyatt or is it looking to be a smaller company with unique assets around the world," comments Arthur Adler, managing director lodging and leisure group, Sonnenblick-Goldman, New York City.
CPH Chairman and CEO William R. Fatt and CPH's determined leadership have been grappling with every side of that issue since the company began its acquisitive run in 1998. The answers were easier in the early going. Though the ultimate goal was to forge CPH into a global player at some level, the immediate aim for a domestic company with less than two dozen hotels in 1997 had to be building critical mass in the market CPH knew best and needed most, North America.
Self-described as a "practical" deal-maker, Fatt passed on a number of showy deals and concentrated on the job at hand. The first, and most logical move, was further expansion in Canada where CPH could leverage market knowledge, brand strength and its reputation as a skilled operator. The domestic market was also the best place for CPH to polish up its deal-making skills. Unlike many of the other growth-oriented hotel companies of the late-1990s, CPH had not been to the table to do a major portfolio deal since it acquired Canadian National's hotels in 1988. Its leadership had to prove they could step up and deliver.
Deliver they did with the US$62 million (C$94 million) acquisition of Delta Hotels' management company and the Delta brand. This easily digestible deal yielded several immediate dividends. It bought CPH dominance in its domestic market, a market the company wants to control however international it becomes. It opened up new avenues for expansion beyond the landmark properties and one-of-a-kind assets synonymous with CPH's own brand. And, it gave CPH flexibility in the kinds of deals it could do in future.
"Delta had been trying unsuccessfully to go public, so this was a very opportunistic move on CPH's part," says analyst Sam Damiani of Toronto-based Newcrest Capital. "Delta gives CPH an opportunity to grow an upscale brand without diluting the icon-status properties that make up most of its CPH's branded portfolio." And, too, there are just so many "icon" or unique assets available. A solid upscale brand without this restriction has broad potential as a growth vehicle.
Just months later, CPH signaled its real intentions with the US$540 million (C$810 million) purchase of the 3,168-room Princess chain in June 1998. This deal gave CPH a coveted toehold in the U.S. resort market, with the prestigious Scottsdale Princess, and entree to key warm-weather resort destinations in Mexico and the Caribbean. Although the deal brought with it the challenges of integrating a very different, highly centralized corporate culture, it also brought similar high quality assets, good RevPAR and rate numbers, significant upside potential in the form of the under-performing Acapulco hotels and the promise of a new revenue stream that would complement CPHs renown winter resorts in Canada.
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"Princess was another great deal for CPH. It enabled CPH to leverage its customers from one market to another," says Damiani. "It opened up a wider sector of the hotel market and helped CPH deal with the fact that its winter resorts are somewhat seasonal."
GROWTH VEHICLE
While both of these deals earned high marks for CPH's leadership, it was the Fairmont deal (expected to close by year's end) that could take CPH where it wants to go. "Fairmont was a good, strategic acquisition for CPh,".says Michael French, partner, hospitality and leisure for the Americas, based in the Philadelphia office of PricewaterhouseCoopers. "CPH needed to have a strong foothold in the gateway cities of the United States if it really wanted to grow; otherwise, it would always be playing catch-up. The Fairmont deal makes CPH more than just a company that has great resorts."
Sonnenblick-Goldman's Adler adds,."Fairmont is a very good match for CPH. It is by far the most similar group in the United States. There should be good opportunities for the U.S. properties to cross-market and play off CPH's other hotels."
CPH had flirted with a Fairmont deal even before Fatt took the helm at CPH. At that point, CPH had declined and Los Angeles-based Maritz Wolff & Co. and Prince Alwaleed's Kingdom Hotels (USA) became Fairmont's owners. The deal on the table the second time around was more to CPH's liking. CPH got the controlling interest in Fairmont it wanted through the purchase of a 67% stake in the management company, while Maritz Wolff & Co. and Kingdom Hotels each retain a 16.5% stake. CPH will contribute management contracts for 28 hotels to the newly formed Fairmont Hotels and Resorts Inc.; the pre-existing Fairmont Hotel Management L.P. brings the management contracts for all seven of its properties as well as the Fairmont brand.
"Fairmont was a natural fit," says Fatt. "It has the same unique properties as we have and very similar performance. The more we talked and the farther we pursued the deal, the more sense it made. It would have taken us a long time to get this level through single-asset growth." What CPH saw on paper is what it got in the deal, and then some. CPH and Fairmont share much the same customer base. Both companies focus on larger hotels, generally 300-700 rooms, and both include the kind of unique hotels that tend to be as recognizable, if not more so, as the brands themselves. They both average strong occupancies in the mid-70s and high GOP. Little renovation is required for the hotels in either brand, with the exception of the massive work under way at the Fairmont in San Francisco. "The cultural similarities are making integration fairly straightforward," adds Fatt
THE JOB AT HAND
Integration is a key issue for CPH at this point. The investment community is taking a close look at how well and quickly it can turn its acquisitions into a stronger bottom line. Fatt, Chris Cahill, president and COO, and most of CPH's senior management have been on a series of extended road shows since the Princess deal closed to make sure the company has "buy in" from everyone in both Princess and Fairmont. These strategy sessions range from high-level meetings with the those who will have regional responsibility to meetings with the general manager and all department heads and, finally, a session with the entire staff.
In the last 18 months, Fatt has spelled out CPH's intentions to top executives in board rooms and more than 1,200 employees swelling a ballroom. "I try not to leave anyone uncertain about our direction. I don't want our employees to spend their time wondering what's going to happen. I'd rather show them a work in progress, tell them where they stand and say there are issues we're still working on," says Fatt, interviewed at the Fairmont Chicago during his second visit to the property since the deal was announced.
The 48-year-old Fatt is more used to talking numbers than giving pep talks (something that challenged the "quiet" Fatt initially, but something he says he's come to enjoy). After being graduated from York University with a B.A. in economics, he spent 25-years parlaying his accounting background into executive positions in more than half a dozen name-brand Canadian companies.
His career-long financial expertise, his ability to see and manage the big picture and his newly gained experience viewing hotels as both owner and operator, will be essential skills for the next phase of CPH's expansion.
SHIFTING FROM
OWNER TO OPERATOR
The Fairmont deal not only marks CPH's entry into a new market; it also continues the company's shift from the owner/operator role it played for much of its 113 year history to a more pure role as an operator. The seeds of this change were planted in 1997 with the formation of Legacy Hotels Real Estate Investment Trust, then the first of its kind in Canada. CPH disposed of 11 hotels to Legacy. That deal netted proceeds of US$399 million (C$642 million) and a one-third interest in Legacy.
These funds combined with an after-tax gain of US$12 million (C$20 million) from selling shares in a less than synergistic U.S.-based Doubletree Hotels Corp. the previous year helped to provide a source of ready cash for deal-making.
If CPH is going to come close to Fatt's projected goals of achieving double-digit annual growth in the number of rooms and net income, it obviously needs to court investment partners. "We have to prove ourselves if we are going to compete for management contracts. We have to show we are willing to invest alongside our partners. We would look at investing 20% or more if something is truly unique," says Fatt. "We have the advantage that we are still small enough that we can tailor ourselves to the individual needs of owners."
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| The 613-room Chateau Frontenac in Quebec City is typical of the icon-status properties that make the core holdings of both CP and Fairmont. Fairmont's leadership says the company will continue to pursue one-of-a-kind properties to grow the brand. |
"We're going to be flexible when it comes to management contracts," adds Cahill. "We come at management from the perspective that we are owners, too."
Growth is definitely on the agenda, not only in Fatt's view but in the view of his aggressive, growth-oriented partners in Fairmont. Prince Alwaleed's organization jump-started both Four Seasons and M–venpick into global expansion; Maritz Wolff brought a new energy to Rosewood. Fast growth for Fairmont would fill a niche in both partners' investment portfolios for a luxury chain large enough to attract convention and group business yet with a high enough profile to sell FITs.
The connections of these two powerful partners have opened up a deal conduit CPH would not have been able to tap on its own, says Fatt. Cahill and Edward Mace, president and CEO of the U.S. and Mexico division, have already identified possible targets "in every U.S. market in which Fairmont would want to be." The primary targets will be icon assets, though green field projects will not be ruled out.
Though not all these targets are even on the market, Fairmont is serving notice that it is interested if and when they are available. "The test for everything we look at is whether the asset fits our brand," says Cahill.
CPH and Fairmont will continue to shop deals in Canada as well. "It's always a problem when you grow so much that you don't pay attention to your domestic market and what made you grow in the first place," says Cahill, who moved to CPH from Delta. "Canada will remain an important component in our business plan."
Mace add that it will be more important for Fairmont to get into the market with a good product than "to rush in just to be a in a given market." The markets CPH is looking at will have to be able to support larger hotels that typically draw 40% to 50% of the business from the group market. Fairmont has its eye on targets in both urban and resort destinations. Initially, the goal will be to reach what Cahill considers critical mass: about 55 to 60 hotels. "We use those numbers but, really, critical mass is really more about the right locations than the right numbers," Cahill says.
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| The Fairmont deal gave CP Hotels a coveted entree into the U.S. market with irreplaceable assets such as the 805-room Plaza Hotel in New York City. It also brought to CP Hotels a very similar portfolio of fairly large hotels that market to high-end group and FIT business and a history of good performance--both of which should help ease integration. |
In terms of portfolio acquisitions, the acid test will be on how much of the existing source market of the group is complementary to Fairmont's; what the presence of the brand is in the marketplace and how well the "personalities" of the two companies match up. While portfolio deals are possible in the United States, they are probable as the only means of effectively building a fast-track global presence. "We really have no fixed plans outside of North America. There are some markets such as London where you could justify buying a single asset. But, there is a higher return on portfolio deals," Fatt says. "We also have to look at the markets. Prices are high in Europe. Asia is in flux. It's hard to read prices in Asia as high or low or in-between because it's hard to fix a target price per room. We plan to be opportunistic in looking at Latin America. It all goes back to looking at each opportunity in terms of the fit."
Whatever the pressure to grow, Fatt is not about to leave the discipline that got him where he is. The deals he has not done, including taking a pass on Inter-Continental as being too big a bite for CPH, have won him as many plaudits as the deals he has done. Fatt's track record, as well as CPH's, will be on the line if, as he plans, Fairmont goes public in the medium term.
"If Wall Street had a more positive view of hotels, CPH might be able to take Fairmont public as it is," says Adler. "The company is good at operating hotels and very strong at the senior level. Bill Fatt gets high marks. He's patient, methodical and prudent. He won't do adeal just because he needs to do a deal." In essence, CPH has the management, the motivation and (thanks to the blessing of its corporate parent) the money to become a player in North America and beyond.
The Next Step
CPH has done well so far, but laurels don't carry much weight in the fiscal circles in which the chain now travels.CPH has to decide whether it will be content to be a growing player in North America or whether it is willing to risk global expansion. Consultants and analysts see the following issues as the key challenges ahead.
* CPH needs another portfolio deal. "Another acquisition would help CPH," says Sonnenblick-Goldman's Art Adler. "The problem is that it's hard to say what that deal would be. If Wyndham would let go of Carefree Resorts, which it won't, that would be the kind of deal that would put CPH over the top." A deal in Europe would also make it clear CPH is serious about building a global presence.
* Integration needs to be quick and smooth. CPH is already outpacing the projected US$1.35M (C$2 million) savings expected from Delta's integration. CPH's William Fatt predicts it will be two to three years "before we see the results of our efforts with Princess." The near-term goal is to analyze both companies' operations and create an integrated approach based on the best practices of both.
* CPH can't lose its discipline, but needs to pick up its growth pace to satisfy both the parent company's investors and the aggressive goals typical of Prince Alwaleed and Maritz Wolff. "If CPH can drive multiples even close to Four Seasons, it will have a home run," says analyst Sam Damiani.
* CPH needs to show it can mitigate downside risk. Moving out of real estate helped, but CPH needs to show investors it has plans that would limit risk exposure.
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