China's BTG acquires Homeinns in $1.7 billion deal

Chinese economy hotel brand Homeinns Hotel Group announced on Tuesday that it has plans to merge with the Hong Kong and Cayman Island subsidiaries of BTG Hotels Group Hong Kong. BTG is expected to purchase Homeinns in a deal valued at RMB11 billion ($1.7 billion).

NASDAQ-listed Homeinns, which is based in Shanghai, operates China’s largest budget hotel chain. The merger is likely to be finalized in the first half of next year, pending regulatory and other considerations. Homeinns’ stock was trading 7.3 percent on Monday on the back of the news.

Upon approval of the deal, Homeinns will be a wholly owned subsidiary of Shanghai-listed BTG Hotels and will be de-listed from NASDAQ. Homeinns owns five brands and operates more than 2,700 hotels.

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The move could be a well-timed one for Homeinns, which reported a year-on-year profit drop of 57 percent in the first nine months of this year.

"Looking to the balance of the year, while we do expect the external market conditions to stay difficult, we remain a strong beleiver in China's travel industry and leisure market," said Homeinns CEO David Sun in the company's third-quarter results announcement. "With accelerated development of our mid-scale hotels and stringent cost control, we are confident that we will be able to continue weathering a choppy economic environment, further solidifying our leading position in the market, seizing new growth opportunities, and creating value for our shareholders."

Budget brands such as Homeinns were once star performers in China’s hotel sector, but the emergence of boutique hotels has changed the market. Boutique hotels may cost up to 30 percent more than budget hotels in terms of setup costs, but they can also charge up to more than 50 percent more than their budget competition. This has not been lost on investors.

BTG Hotels said its purchase of Homeinns would be supported by a loan facility of as much as $1.2 billion from the New York branch of China’s largest commercial lender, Industrial and Commercial Bank of China. The Homeinn acquisition will complement existing BTG Hotels brands, including BTG-Jianguo Hotels and Resorts, BTG-Jinglun Hotels, Shindom Inn. The deal is expected to close in the first half of 2016.

BTG is a state-owned company with a portfolio that only includes 100-plus hotel properties scattered across different price points, also includes travel and tour groups as well as tourism destinations such as the Hainan Nanshan Cultural Tourism Zone on Hainan Island. According to its website, it intends “to build the most influential and ethnically rich international hotel group in China.”

Assuming that the merger receives regulatory approval, it will be the biggest M&A deal in China’s hotel sector since October’s acquisition of Plateno by Jin Jiang.

Under the terms of the deal, BTW will pay $35.80 for each American depository share of Homeinns, 19 percent more than the June 10 close price. Homeinns shares spiked 7.34 percent on Monday to $34.50, easily topping a 52-week high of $32.83 they hit in mid-June. Homeinns will also be delisted from Nasdaq, where it has traded since 2006.

BTG was founded in 1999 and has been listed on the Shanghai Stock Exchange since 2000. In 2009, BTG acquired Qianmen Jianguo Hotel, which gave it three four-star hotels. The company started a reorganization process in 2012 which put several subsidiaries under the umbrella of the listed company. 

In a separate deal, Aetos Capital Real Estate, a New York-based investment firm, is considering selling a controlling stake in the Super 8 hotel in China. The deal could be worth as much as $250 million. Wyndham Worldwide Corp. owns Super 8 but Aetos controls the Chinese operations, Bloomberg reported quoting unnamed sources.