Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Investors in InterContinental Hotels just got the honeymoon suite.

The hotel operator will return $1.5 billion to shareholders in the form of a special dividend, it said Tuesday, taking the total returned since 2003 to $12 billion.

There was also a 10 percent increase in the final dividend to 85 cents per share. The payouts show it's not starting to tuck its money under the hotel mattress (free cash flow rose 27 percent to $586 million last year) to whip out when a suitable deal emerges.

Cash is King-Sized
IHG's cash flow has improved because of its shift to an asset-light business model
Bloomberg data

With InterContinental set to lose its ranking as the world's biggest hotel company (by hotel numbers) once Marriott completes its acquisition of Starwood this year, it might have been tempted to join the M&A party going on in the room next door. Instead, it's a seller: of Le Grand Hotel in Paris and the InterContinental Hong Kong. Its reluctance to become a buyer might see it being bought.

Hoteliers and lodging REITS have been the target of $75 billion in takeovers since the start of 2014, according to Bloomberg data. A chunk of that comes from Marriott's agreement in November to buy Starwood for about $13.5 billion including debt. Blackstone last year purchased luxury hotel-owner Strategic Hotels & Resorts for about $6 billion with debt.

On the face of it, prices aren't overly rich. Marriott's stock-and-cash bid was only a 5 percent premium to where Starwood was trading before reports of takeover interest in October, while Blackstone paid about an 8 percent premium to Strategic Hotel's price before bid interest emerged.

InterContinental has the muscle to barge in to the action if it chooses. Net debt is just one-third of last year's Ebitda after the Paris and Hong Kong disposals, according to Bloomberg data, so the balance sheet will still be robust after the payout.

Yet it seems to prefer smaller transactions, such as last year's $430 million purchase of Kimpton. CEO Richard Solomons told Bloomberg TV that bolt-on acquisitions were more likely.

InterContinental has been moving to an "asset light" model, where it manages or franchises hotels rather than owning property. This means it doesn't have to dig into its own pockets to fund the purchase of real estate to expand. It also means it might go against the strategic grain to seek big deals.

But with the company dedicated to returning excess cash to shareholders, InterContinental may well become prey for the deal-hungry, with Asian buyers mooted or possibly Hilton.

The shares, which rose more than 4 percent on Tuesday, are up 9 percent so far this month, compared with a 2.7 percent fall in the Stoxx 600 Travel and Leisure Index. They trade on 18.7 times estimated earnings for this year, in line with Accor but a discount to Hilton.

Fair Value
IHG shares have typically traded at a similar forward 12 months P/E to rivals, with Hilton as the outlier
Source: Bloomberg Intelligence

So while InterContinental isn't particularly cheap by historic standards, a bid approach is feasible. There are concerns, such as slower growth in the Americas because of lower hotel use in regions dependent on the oil industry. The Americas accounted for more than half group sales last year. InterContinental is exposed to China, which accounted for 12.4 percent of sales. That's attractive in the long-term -- particularly for an Asian buyer -- but could mean choppy trading for now.

None of that's likely to deter suitors looking to scale up in response to the assault from Airbnb. InterContinental's cash returns are attractive to investors. Adding in possible bid interest means there's also the chance of having their rooms upgraded.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net