HOTELS

Hotels 325 - Hotels

Growth was the byword for the world’s biggest hotel chains in 2005. The year 2006 should not be much different. Merger and acquisition (M&A) activity shows no signs of slowing down. “Shareholders will continue to expect quantum growth, not organic growth. If a hotel company is not ‘dining,’ it is potentially another company’s dinner,” says Russell Kett, managing director, HVS International, London. Kett predicts that, even with last year’s deal pace, satiety is some way off. “All things being equal, consolidation is set to continue apace. The big will continue to get bigger as long as there is investor appetite out there and as long as the so-called ‘wall of money’ remains on tap,” he adds.

Will they meet their goals by buying up their Top 20 peers? Arthur de Haast, global CEO, Jones Lang LaSalle Hotels, London, points out that the trend toward going “asset lite” is shrinking some of the giants’ market cap sufficiently “to make them more digestible.” However, since many major chains have their brand stables filled, “it is questionable whether they would gain significantly from adding any more,” de Haast says. “Creativity, such as co-branding in key strategic markets, will be required if M&A activity is going to add significantly to growth plans.” Some aggressors still see opportunities. When asked about acquisitive approaches to InterContinental Hotels Group by Starwood Hotels & Resorts, CEO Andrew Cosslett declined comment. “There are plenty of people commenting already,” he told HOTELS.

Arthur Adler, CEO, Americas, Jones Lang LaSalle Hotels, New York City, forecasts “very little shake-up from the top tier brands/hotel companies. They are well positioned for growth, particularly international growth. The companies that are vulnerable are those that lack the scale and the ability to grow either by expanding their property segments within the U.S. market or by growing internationally.” The “big four” (Starwood, Hilton, IHG and Marriott) will continue to dominate, he predicts.

David Pepper, Choice’s senior vice president, franchise growth and performance, sees M&A activity being driven by chains that want to “marry up” and even some larger companies that have niches to fill. The most likely targets will be smaller chains that fill in brand families—specifically all-suites and extended stay. The challenge here will be to find value-for-money deals. Not every small player has assets that meet the standards of international brands and some that do are owned by closely held conglomerates or shareholders with controlling interests.

New Money

The next major changes in the leader board are more likely to come from outside private capital investors such as the Blackstone Group and Colony Capital, as well as high net worth individuals such as Prince Alwaleed. “The availability of private equity and the continued strong performance of the hotel industry suggest that further consolidation and M&A activity is likely,” says Steven A. Rudnitsky, chairman and CEO, Cendant Hotel Group, which is about to become Wyndham Worldwide. “Companies that want to stay ahead of the curve must focus on exceeding customer expectations by providing excellent service.”

Portfolio deals will not be the only growth drivers. Leading chains will keep divesting non-core assets to institutional and private buyers to free up capital for further growth. “I do not see a lot of consolidation among the 5-star chains. They are well capitalized. But I do see more individual asset sales,” predicts Tom Hendricks, vice president of development for Mandarin Oriental Hotel Group, the Americas, Miami. And why not? Chains such as Mandarin are being offered as much as double the expected cap rates for hotels in key markets. A string of major brands’ 5-stars have sold for more than US$800,000 per key—not bad seed money for groups looking to expand or pay down debt.

Luxury chains will be facing more competition from start-ups as well as increasingly aggressive mature brands. “There are a lot of new players—Starwood Capital Group’s Crillon, Marriott’s Bulgari,” Hendricks says. “They all have access to capital. But, how viable can they be with three or four assets? Unless they acquire a large portfolio, it will be hard to get the critical mass they need in the short term.”

Still, Hendricks maintains that small chains have a place in the market. “Can they survive? Yes. Lots of small chains have been around for years. But, it will be challenging for them.” Some industry watchers contend that asset lite strategies leave chains open to just that kind of danger. Given legal precedents, lock-out contract demands are a thing of the past. Most companies are keeping some balance between ownership of strategic hotels and fee income to protect their flagships. But, how lite is too depends on the point of view and the sector play. “Asset lite is a good model for creating value all around,” Cosslett says. “It is not just about unlocking the value of the real estate; it is a model that means you can take advantage of a positive situation and grow faster. Companies that have done well have done so because they built good brands, not because they own real estate.”

With demand growing and supply in check in many markets, there are few obstacles to further expansion. One exception is the rising cost of construction materials. Even that may have some upside—especially for the giants, says Thomas Keltner, president, Hilton Hotels Corp.’s brand performance and development group. “If construction costs get out of hand, the strong brands will get more than their fair share of the projects. It is a time when big companies are likely to get bigger. As business becomes more global, you have to be of a critical size to spread technology across your hotels and maximize efficiencies. That is hard for small companies to do,” he says.

The Exceptions

Even the heads of the big brands see a continuing role for specialty operators such as Six Senses and Amanresorts, as well as domestic companies nurtured by strong new markets: India’s Taj Hotels, Resorts and Palaces; Middle Eastern chains such as Jumeirah and Rotana Hotels; and China’s Jin Jiang, Jinling Hotels & Resorts and Guangdong Hotel Management Holdings.

“Throughout Asia, the hotel industry has witnessed an increased effort toward differentiation of product,” says David Gibson, CEO, Asia Pacific, Jones Lang LaSalle Hotels, Brisbane. “Owners generally are attracted to reputable management companies that can differentiate themselves and offer access to global distribution systems. Overall, these will be the growth companies. But there is room for everyone. We will continue to see ego and boutique hotels in iconic destinations.”

Consortia Focus On Clarity

Product differentiation and systems integration are powering up the numbers for the world’s leading marketing and reservation services. “We have seen a significant shift among chain-affiliated hotels who are rediscovering their independent roots,” says Thomas Griffiths, vice president—the Americas, Leading Hotels of the World. “One of the key opportunities for the industry lies in creating a unique and differentiated guest experience that enables each guest to personalize his or her stay.”

Like chains, the consortia are focusing on brand clarity to answer guest demand for “something different.” Segmentation is a major theme as more companies spin off spa hotel, golf hotel, design hotel and even eco-hotel “labels” to grow membership and broaden their market base. “With so many new divisions and categories offered by the larger hospitality parent companies, the biggest challenge is clearly differentiating each ‘mini-brand’ and making it clear to the customer what they get with each,” says Ed Donaldson, vice president—the Americas, Small Luxury Hotels of the World. The growth companies will clearly define their brand in the marketplace “and deliver on it from start to finish—the losers will get lost in the confusion.”

Organic Growth

To boost numbers quickly, most consortia will be looking to organic growth. “Consolidation among the central reservation service players may be starting to slow,” says Bill Nicholson, CEO, SynXis. “But, consolidation of services vertically will continue. Those companies that can achieve the status of being truly one-stop hospitality services shops will continue to grow. If they are well-integrated, they will help to simplify what has been a complex tangle of multiple service companies.”

Deal-making is more likely to be about niche plays than big numbers. “I believe it will be a natural evolution of M&A where the larger brands continue to get a piece of smaller puzzles and have a foot in different segments,” Donaldson says.

New Business

The Internet continues to swell the membership ranks for marketing and reservation services. “Companies small and large are able to compete on an equal footing, strengthening their brands, establishing points of differentiation and developing customer relationships,” Nicholson says. “The size of the company does not matter. It is their use of technology and practices such customer relationship management, search engine optimization and search engine marketing that will set them apart.”

Growth companies are going to have to prove they can deliver—not only as well as their competitors, but as well as corporate chains. Although projected occupancy and rate gains in many major markets should lift performance across the board, Griffiths says that companies that want to stay on top of the consortia ranks “must look outside of the normal and traditional sources of business and look across the oceans for new customers.”

Technological breakthroughs could give the consortia’s numbers a healthy boost. “One of the biggest challenges/opportunities is the fact that every hotel customer, whether an independent property or a large group, expects seamless integration of all their various systems,” Nicholson says. Working toward universally accepted standards for connectivity will help make that possible. The trend now is toward central reservation services that provide connectivity with the broadest possible range of property management systems and provide broad point-of-sales distribution to maximize the property’s potential revenue.