Deal appetite swells in Spain, but economic angst persists

Catalonia's want for independence has not yet tripped up Spain's economy, but there is mounting concern that the country's economic resurgence could be disrupted should the Catalonia crisis not be resolved expeditiously. Until that time, investors within the country are itching to get deals done, with news that Spanish hotel operator Barceló Hotel Group has offered to buy competitor NH Hotel Group in a multibillion-euro merger that would create the country’s largest hotel group.

Spain's third quarter, which didn't account for any fallout from the Catalonia October 1 referendum, showed resolve with gross domestic product expanding by 0.8 percent in the period from July to September. This is a pattern: Spain's GDP grew 0.9 percent in the second quarter and 0.8 percent in the first quarter.

The quarterly growth data are reportedly in line with forecasts, and full-year economic growth of 3.1 percent is expected for this year. And while Madrid is confident of meeting its 2017 goal, it has revised down its 2018 forecast to 2.3-percent growth versus 2.6-percent growth previously, an admittance that the fluid political situation will likely have an adverse impact. Many believe that the Catalonia situation, which started as a powder keg, will, however, peter out. "Markets deem it unlikely that Catalonia will go full rogue and try to engineer some kind of hard break from Spain. After all, they don't have the support of government structure to do that," Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics, told CNBC in October.

Even so, political unrest could benefit the region. "The worse it gets geopolitically, the easier monetary policy will be," Vistesen continued. Madrid moved in quickly to restore control in the region, and called for elections on December 21, but there remains future uncertainty, which businesses loathe and often makes them recoil. 

“Companies in Catalonia have frozen their investment decisions and hiring decisions due to the uncertainty,” Daniel Lacalle, chief economist at fund manager Tressis told The Financial Times. “Consumers are nervous as well,” including travelers; Catalonia, which includes Barcelona, witnessed a drop in tourism following the referendum, which in turn hurt local economies. 

Still, there is longterm optimism in Spain's economy, which is helping to drive deal flow in the country, especially hospitality-linked investment. There are reasons to expect further M&A, not of least because debt is still relatively cheap. Though the European Central Bank in October announced it would be reducing its quantitative easing program—the bond-buying scheme that helps to keep interest rates low—beginning in the new year, it's not abandoning it altogether, slashing it from €60 billion per month to €30 billion per month.

Deal Craze

There has been no shortage of deal impulse in Spain. The latest is Barceló's reported overture to acquire NH Hotel Group, which operates nearly 400 hotels mainly in Europe and Latin America, in a deal estimated to be worth as much as €2.2 billion. The proposal would give Barceló 60-percent control of NH. Rumors about a purported deal began circulating back in September. (Barceló has more than 230 hotels and more than 50,000 rooms in 21 countries.)

One potential obstacle to the deal could be NH Hotel's largest shareholder, HNA Group, which owns around 30 percent of the company (it also owns 29 percent of Hilton and wholly owns Carlson Hotels). HNA is currently embroiled in its own trouble, a recent Wall Street Journal story exposing HNA's debt-fueled expansion and nebulous ownership structure. The exposé out as Beijing continues to put the clamps on outbound investment by Chinese companies in certain sectors. 

As Reuters reports, Barceló, in a letter sent to NH, proposed a reverse takeover by NH, "with Barcelo suggesting that NH pay for Barcelo with an issue of new shares at a value of €7.08 each, a 27-percent premium to NH’s average share price over the last three months." A reverse takeover is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public.

The proposed Barceló deal, which is still in preliminary stages, is evidence of the appetite for deals by many classes of investors. In October, private-equity giant Blackstone Group acquired a portfolio of 14 hotels representing more than 3,700 guestrooms from Spain's Banco Sabadell. The investment followed Banco Popular's sale of a majority stake in its real estate asset portfolio to Blackstone. 

Of the deal, Jon Gray, global head of real estate at Blackstone, had this to say about Spain: "This significant investment reflects our continued confidence in the robust recovery of the Spanish economy."

"Spain is very attractive for institutional money," noted Gaël Le Lay, Deputy CEO of Foncière des Murs, during October's Mediterranean Resort & Hotel Real Estate Forum. 

Spain continues to be a liquid market, which is spurring even more deal activity and helping drive prices up. "Liquidity is being brought to Spain, which makes me more confident that valuations will go up," said Tina Yu, SVP at KSL Capital Partners, also during the Mediterranean conference.

Perceived opportunity is also spurring many types of investors to dig into the market. "Spain is a very liquid market with lots of different opportunities—there are public and private companies and real estate investment trusts," said Dominic Seely, director of acquisitions at Westmont Hospitality. "In the Spanish economy, corporates are starting to spend. Couple that with the fact that there has been almost no new supply and there has been double-digit [revenue-per-available-room] growth.”

Spain’s tourism sector continues to boom, benefitting from the political risks in north Africa. A reported record 36 million foreign tourists visited the country in the first six months of the year, an increase of more than 11 percent on last year. Tourism accounts directly for around 11 percent of Spain’s economic output.