InterContinental Hotels Aims to Close Value Gap to U.S. Rivals

InterContinental Hotels Group Plc (IHG) Chief Executive Officer Richard Solomons aims to convince investors that the U.K.-based owner of the Holiday Inn brand is worth more than it’s being given credit for.

The hotelier’s shares trade at a multiple of 19.3 times earnings, less than U.S. competitors such as Marriott International Inc. and Starwood Hotels & Resorts Worldwide, which have price-to-earnings ratios of 28.3 and 42.2 respectively. Solomons said he’s aiming to close that gap.

“We are undervalued relative to U.S. competitors,” the 49-year-old executive said in an interview at the company’s headquarters in Denham, England. He cited the stability of InterContinental’s midscale hotels during the 2009 recession, its ability to generate cash, reduce debt and increase its dividends faster than competitors.

Solomons’ message is starting to be heard. InterContinental Hotels shares have risen 1.6 percent this year, while Starwood has fallen 4.8 percent and Marriott is down 16 percent. For the valuation differential to close further, the CEO may need to persuade European investors that they should pay as much as their U.S. counterparts would for a company that makes most of its income from hotel franchising and management.

Photographer: Chris Ratcliffe/Bloomberg

InterContinental Hotels Group Plc chief executive officer Richard Solomons. Close

InterContinental Hotels Group Plc chief executive officer Richard Solomons.

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Photographer: Chris Ratcliffe/Bloomberg

InterContinental Hotels Group Plc chief executive officer Richard Solomons.

“IHG stock is primarily owned by European investors and these investors tend to pay less than their American counterparts for franchise-based businesses,” said Patrick Scholes, an analyst at FBR Capital Markets. Investors are also inclined to pay more for income from high-end hotels than for mid-scale properties such as Holiday Inn, he said.

Higher Profit

About 30 percent of InterContinental Hotels’ shareholders are located in North America, according to Solomons, the former chief financial officer who succeeded Andrew Cosslett as CEO.

“We will push hard to get the message across, but ultimately, the results will speak for themselves,” he said.

The hotelier said in May that first-quarter profit gained 28 percent as it raised revenue per room in China and the U.S., its biggest market. First-half earnings are due on Aug. 9.

Solomons said he’s “pretty confident” on the outlook for both business and leisure travel.

“Occupancy is rising and rates are starting to move off of that,” the CEO said. “The big guys are winning share.”

Bookings made through mobile technology have jumped more than tenfold since last year to $10 million a month, according to Solomons, who said much of that is from new customers.

InterContinental Hotels operates about 3,800 of its 4,400 properties under franchise agreements and owns less than 1 percent of them.

Barclay New York

“In five years we will still have capital invested in hotels, but it will probably be different hotels” as the company expands, said Solomons, who expects to announce his successor as chief financial officer “soon” after a search that involved internal and external candidates.

The company, which also owns the Crowne Plaza and boutique Indigo hotel brands, has spoken to potential buyers of the Barclay New York property that it put on the market at the start of the year, according to the CEO. It is looking for the “right partner” to allow it to continue managing the property and to spend $100 million on refurbishment, he said.

The hotelier doesn’t have to make acquisitions to grow, the CEO said. The company’s “significant financial firepower” may also be used for dividends, he said.

“We will continue to drive great results and outperform the competition,” Solomons said.

To contact the reporter on this story: Armorel Kenna in Milan at akenna@bloomberg.net.

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net.

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