Consolidation always comes after a crisis. The strong buy the weak; industries get healthier with all that chaff gone and stakeholders get happier as enterprises grow.
But COVID-19 isn’t just any crisis. And the wave of M&As it could trigger could carry away hotel companies that wouldn’t have been vulnerable in any other scenario.
The giants — the Marriotts, Hiltons and Accors — shouldn’t have much to worry about. Hilton has no major credit facilities due this year. Marriott International announced a US$1.5 billion, 364-day revolving credit facility commitment and leverage covenant waiver for existing revolving credit facility in late April. Accor has US$2.7 billion worth of cash on hand and an undrawn US$1.6 billion credit? facility. But never say never.
Contributed by Mary Scoviak
“Shareholders might provide the impetus to consolidation at this level,” said Paul Slattery, director, Otus & Co., London. “They’re looking for options if performance is suffering and returns don’t meet expectations. Take Marriott’s acquisition of Starwood Hotels & Resorts — that consolidation saved Marriott hundreds of millions of dollars. Lenders won’t be able to ignore that. Big deals are inevitable when driven by shareholders and lenders.”
While Michael Bellisario, director, equity senior research analyst, R.W. Baird, doesn’t foresee giants buying giants, he’s not ruling out big-deal consolidation altogether.
“If there’s a once-in-a-lifetime opportunity to acquire something like, say a company with the cachet of Four Seasons, and the conditions are right, big caps like Blackstone might buy,” he said.
Appetite is ‘huge’
Overall, mid-sized companies with heavy exposure in hard-hit sectors such as big box, city center convention hotels or fly-to leisure destinations that could jump start consolidation starting next year. At the same time, small companies hamstrung with limited negotiating or buying power and any company struggling with cash flow problems or failing debt service could, too.
“Companies like these are circling their wagons. The appetite for M&A is huge. They’re going to have to put strategies in place to protect themselves from becoming targets,” said Homi Vazifdar, CEO, Canyon Equity, Larkspur, California.
Private equity shops could target platforms with potential, especially those that can’t keep up with cap ex or PIP requirements and need cash infusions to tap a repositioned upside. Bigger brands and well-capitalized tier-two players hoping to fill gaps cost-effectively (think wellness concepts, sustainability infused flags and startups) could grab hot niche concepts.
“It’s not a good time to be a young brand unless you have a robust pipeline in place,” said C. Patrick Scholes, managing director, lodging, leisure and gaming equity research, SunTrust Humphrey.
Whether bargains or best in class, smaller fish in Europe and Asia had better swim faster. Martin Smura, CEO, Kempinski Hotels, Geneva, sees some new twists on consolidation as groups fend off the sharks.
“We have to look at the opportunities that are arising from this situation. Consolidation is one, but it doesn’t only mean takeovers. Smaller operators who don’t have cash to buy each other might start looking at how to join forces,” he said.