National Report – As the rumor mill churned out reports of stockholders pushing for a sale of InterContinental Hotels Group, the UK-based hotel operator made an acquisition of its own.
Last month, IHG acquired boutique hotel chain Kimpton Hotels & Restaurants Group for $430 million, overnight expanding its lifestyle business: there are currently 62 Kimpton hotels operating across 28 U.S. cities, under names including Monaco and Palomar.
Where they aren’t operating is outside the U.S.—but that will assuredly change now that its parent company is a global powerhouse with tentacles reaching all pockets of the world.
By the sound of it, Bill Kimpton’s brainchild is in good hands—hands that aren’t looking to muck up what the brand has built up in some 35 years.
For one, Kimpton’s headquarters will remain in San Francisco. Two, its much-loved Karma Rewards program will not—as of now—be folded into IHG Rewards Club. Three, its executives will remain in place, with Mike DeFrino, Kimpton’s former COO, becoming the new CEO. Current Kimpton CEO Mike Depatie will step down to focus on management of the Kimpton real-estate funds.
The deal included no real-estate interests. It was purely for the brand and management contracts.
Hotel Management spoke with IHG CEO Richard Solomons the morning after the news broke, and he was adamant that the Kimpton brand would not be trifled with, only improved upon.
“We bought this business for what it stands for and we are not going to change it,” Solomons said. “We will adapt it and make it better. That’s very important for guests to know.”
In listening to Solomons, one gets the sense that he is genuine. “We recognize this brand is successful for a reason and we respect that,” he said. “We are buying it for what it stands for. This isn’t a private-equity-type deal where it’s just about the numbers. It’s a long-term play.”
The Kimpton acquisition complements IHG’s other lifestyle brand, Indigo, around 60 hotels strong.
With IHG at its back, the plan is to continue to grow Kimpton stateside, but also overseas. Solomons said he’d “love to see” a Kimpton hotel in London and Paris. IHG has successfully grown Indigo internationally.
This is what IHG can do for Kimpton: grow it where it hasn’t been able to before. “There is a ton of opportunity still in North America and globally,” Solomons said. “We know there’s demand. It’s not about [exact] numbers [of hotels], but the demand from customers and owners.”
One thing IHG does bring to Kimpton is scale. Consider technology: “Kimpton has a very tech-savvy guest, but a small company like Kimpton can’t afford to invest in technology like we do,” Solomons said. “We aren’t going to ram what we do down their throats. But think about enabling that guest experience. It’s a real way to respect the brand and add value to customers and returns to owners.”
As it stands, Kimpton’s current pipeline sits at around 16 hotels, while Indigo’s is around 60. Solomons said that some of the pipeline assets could be better as Kimptons or Indigos, “but these brands will not cannibalize each other,” he insisted. “It’s about how we run and think about the brands together as a big boutique lifestyle operation.”
Development wise, expect a mix of conversion and new builds for Kimpton properties. The former in European city centers, Solomons said, but “likely” new builds in parts of the Middle East and Asia.
The analyst community received IHG’s acquisition of Kimpton fairly positively—predominately because the brand has built up such goodwill among all touch points of the hospitality industry.
“Kimpton is a real good, well-respected business in the States,” said Michael Bellisario, senior research associate at Robert W. Baird & Co. “It’s a unique product.”
On the surface it appears that IHG was able to help fund the acquisition with the sale of its Le Grand hotel in Paris. IHG sold the hotel to Constellation Hotels in December for around $405 million. “We think trading one lower-cap hotel in Paris for an entire brand with short, intermediate and long-term growth is a no-brainer,” Bellisario said.
And while he noted that Kimpton customers “love the product,” as importantly, developers, owners and REITs are just as enamored by it. A large proportion of both Pebblebrook Hotel Trust’s and LaSalle Hotel Properties’ portfolios are composed of Kimpton product. “They like the offering, which is why you see them own so many,” Bellisario said.
One of the larger takeaways from the deal, as Scott Berman, U.S. leader for hospitality, gaming and leisure at PwC, explained, is that it illustrated the worth of large global hotel companies, like IHG.
“Major brands still matter,” Berman said. “In spite of positive metrics, major brands have been under pressure around their value. What are they delivering to their owners? That pressure comes from the OTA creep, emergence of short-term rentals and other technology initiatives. And owners had to write some checks in order to qualify and keep up brand standards. IHG has full service, select service, franchise—when you look at the jigsaw puzzle, [the transaction] makes sense. It’s a win for the brands.”
Plugging the Kimpton chain into IHG’s engine will undoubtedly give Kimpton an operating platform it never had before. And, for now, IHG will keep it as separate as possible. As mentioned, Karma Rewards, which is around 1.6-million members strong, will not be tied into IHG Rewards Club, which has more than 80 million members. But in the future, doesn’t it make sense to? Kimpton owners might think so. “At some point it makes sense to combine,” Bellisario said.
The objective is not mucking up what Kimpton already is. “That’s the biggest risk,” Bellisario said. “When the portfolio grows, do IHG practices [grow]? Does brand mentality creep in?”
The final question is: Will the industry see more consolidation? PwC’s Berman believes so, but it may not be on the same level as the Kimpton deal—more regional in form.
Berman is also bullish on another hotel category. “2015 could be the year of the resort,” he said. “In a stronger economy, companies with large loyalty programs are facing challenges of redeeming points for their best customers who want toes in the sand. There aren’t too many redemptions for Minneapolis.”