InterContinental Hotels Group is looking to get a bigger slice of the luxury pie. The UK-based company announced that it is set to acquire a 51-percent stake in Hong Kong-based Regent Hotels and Resorts for $39 million in cash. IHG will have the right to acquire the remaining 49-percent interest in a phased manner from 2026. The transaction is expected to close during the second quarter of 2018.
It's a deal that IHG CEO Keith Barr teased as recently at the International Hotel Investment Forum, telling audiences that the group was positioned to make an acquisition of a regional luxury brand, and at a higher rate plateau than its InterContinental brand.
“There is significant growth potential in the luxury market,” an IHG spokesperson said, calling the company’s InterContinental brand the world’s largest luxury flag. “IHG is unique among hotel groups in that, to date, we have not had an upper-luxury brand in our portfolio—so this is a clear opportunity for growth.” A robust luxury offering also provides a halo effect for all of IHG's brands and the company's loyalty program, the spokesperson said.
The addition of an "upper-luxury brand" should not be seen as competition for the company's InterContinental brand, the spokesperson added. "We consider Regent to be differentiated enough [from] InterContinental from a price point and positioning perspective that it will not cause cannibalization." Furthermore, luxury brands can appeal to owners with both existing brands and new-build opportunities looking for a product that generates sizeable returns. “There are a significant number of owners wanting to partner with IHG on another luxury brand, at a higher price point. Adding brands such as Regent that can play in the upper-luxury segment will complement our InterContinental brand, and again, provide a crucial halo effect for all our brands and our loyalty program.”
Regent's Growth
With only six current Regent Hotels, totaling 2,000 rooms, and a pipeline that stands at three properties (900 rooms), IHG said it will accelerate the brand's growth globally. The goal is to grow the brand to more than 40 hotels with more than 10,000 rooms in key global gateway city and resort locations over the long term.
The acquisition is part of IHG’s strategic initiative focused on continuing to expand its footprint in what it called the fast-growing $60-billion luxury segment. This initiative is supported by the creation of a new dedicated division to further enhance the company’s capabilities in this area and will be funded by IHG’s efficiency program.
"[We] ensure that we have clearly differentiated brand propositions that really stand for something," Robert Shepherd, IHG’s chief development officer for Europe, Middle East, Africa and Asia West, said last month. "Each one offers service, designs and innovative solutions shaped by consumer insight and we continue to evolve our brands to ensure they remain relevant to changing guest demands."
"Certainly, the Regent brand is best known in Asia and China, with most of Regent’s existing system and pipeline there," the spokesperson said. "We see significant potential for growth in that part of the world. That said, we have acquired this brand because it has global appeal and we are confident that by bringing it into IHG’s system we can grow the brand globally. Over time, we would expect to have representation for the brand across all our regions."
Reflagging Luxury
IHG also announced today that following an extensive refurbishment due to commence in early 2020, the InterContinental Hong Kong will become a Regent Hotel in early 2021—returning to the flag it had from 1980 to 2001. “Returning the property to its original roots as a Regent hotel is symbolic of our ambition to return the brand to its former glory and will go down in history as one of the greatest brand comebacks in the hotel industry,” Steven Pan, executive chairman of Formosa International Hotels Corporation, said. “IHG shares our vision for the brand and has the ability to make our ambition a reality. IHG has a deep understanding of how to protect what makes the Regent brand so unique and special, whilst at the same time ensuring that the brand can grow and thrive on a global scale.”
The spokesperson suggested that “a few other existing InterContinental hotels” might move to the Regent flag, but said that the “vast majority” of the brand's growth will come from incremental hotels.
“IHG is already one of the world leaders in luxury with our InterContinental Hotels and Resorts brand, but we see significant potential to further develop our global footprint in the fast-growing luxury segment,” IHG CEO Keith Barr said in a statement. “We see a real opportunity to unlock Regent’s enormous potential and accelerate its growth globally. In addition, by creating a dedicated luxury division, we will be bringing together some of the most experienced and respected people in the industry who will help drive our luxury offer, ensuring that our existing luxury brands continue to evolve and allowing us to bring in new brands such as Regent to enhance our brand portfolio.”
Transaction Details
1. IHG is to acquire a 51-percent interest in a joint venture with Formosa International Hotels Corporation to acquire the Regent Hotels and Resorts brand and associated management contracts. The annual fee income of the six Regent management contracts acquired by IHG will be offset by costs associated with the JV.
2. The 51-percent interest will be acquired for $39 million in cash, paid in three tranches of $13 million, the first upon the date of completion, the second in 2021 and the third in 2024. These amounts will be funded within IHG’s existing capital expenditure guidance of up to $350 million gross, and $150 million net, per annum into the medium term.
3. IHG has the option to acquire the remaining 49-percent stake in a phased manner from 2026. This will be via a combination of put and call options, is capped, and is based on a trailing twelve-month multiple of joint venture income, which based on IHG's current projections would result in a payment of less than $100 million.