Who needs to own a trophy asset when you can derive fees from it instead?
In the hotel industry of 2015, hotel companies are doing just that: buying scale via brand acquisitions. Instead of building brands organically, which takes time and research, and the ability to attract developers, some are turning to acquiring them, plugging them into their vast reservations and loyalty systems, and pushing play.
Today we learn that France's AccorHotels, which operates brands from luxury down to economy, and with a large percentage of its hotels outside the U.S., is in talks to acquire FRHI Hotels & Resorts, whose brands include Fairmont, Raffles and Swissotel, for what sources tell The Wall Street Journal could be as much as $3 billion.
Toronto-based FRHI is owned by a Qatari government fund and Saudi Prince Alwaleed bin Talal’s Kingdom Holding Company. As The Journal writes, Prince Alwaleed was reportedly seen with Accor CEO Sébastien Bazin in the lobby of London's the Savoy, a Fairmont-operated hotel, on Wednesday.
Accor has said previously that only about 10 percent of its revenue comes from management contracts for luxury hotels.
“It’s become much more clear how important scale is to these companies,” Ryan Meliker, a hotel analyst at investment bank Canaccord Genuity, told The Journal.
Accor has a number of brands, but, for instance, only one luxury brand, Sofitel. An acquisition of FRHI would boost its luxury presence exponentially.
Hotel companies these days are following an asset-light approach, marketing and selling owned real estate and concentrating on attaining fees via management and/or franchise contracts—moves that are well received by Wall Street. The more brands you have to offer developers, the more chances you have to derive fees.
“With bigger scale, you get better brand recognition, expanded loyalty programs and bigger marketing budgets,” Meliker said. “These are the sort of things hotel owners look for when picking a brand.”
Now also could be the time for M&A, as the hotel industry may have hit its proverbial peak. While the industry continues to purr along at a pretty pace, supply is creeping up and could put a dent in things as the calendar turns. Expectations are that the hotel industry has two more real solid years ahead, before it flats out.
Which is why M&A is in the news. At least for this week. Beyond today's Accor/FRHI possible link-up, word is Hyatt Hotels Corp. is the frontrunner to acquire Starwood Hotels & Resorts Worldwide. An acquisition of Starwood would instantly give Hyatt more international exposure and a stable of well-known brands, especially in the upscale to luxury segments.
As The Journal points out, hotel analysts believe a desire by Hyatt to get bigger likely drove its decision to engage Starwood in talks. Hyatt has about 160,000 hotel rooms, far less than Marriott International or Hilton Worldwide. Starwood has about 350,000 hotel rooms.