European Hotels: Plan B
The intensifying bid battle for Starwood Hotels may raise the chances that a deal for a European hotelier will mark a new stage of consolidation in the industry.
Connecticut-based Starwood is weighing a $14 billion non-binding all-cash bid proposal from China's Anbang, which is looking to break its target's merger agreement with Marriott, headquartered in Maryland. For whichever of the pair ends up losing out on Starwood, Europe offers a logical plan B.
M&A makes sense for existing players as a way of dealing with revenue pressure and the increasing threat from disruptive entrants like Airbnb, as well the drift to online booking through intermediaries that are demanding an increasing slice of the revenue pie. Scale makes marketing spend go further and increases the size and value of guest loyalty programs.
Meanwhile, for Chinese buyers, hotels have a clear link back to domestic consumers -- a theme underpinning much outbound M&A from the country. France's Accor and Spain's NH Hotel Group have already seen Chinese buyers take stakes.
Since early February, the big European hotel groups such as the U.K.'s InterContinental Hotels Group (IHG), Accor, NH Hotel and Spain's Melia Hotels have outperformed their domestic equity indices. While this may suggest some consolidation expectations, the rally probably has more to do with a decent results season.
This left investors questioning whether the de-rating suffered by the sector last year had gone too far. The forward earnings multiple of the Stoxx Europe 600 Travel & Leisure Index had fallen about 27 percent from early last year to the lows of February 2016.
Still, the region contains attractive consolation prizes for a losing Starwood bidder. The most obvious target is IHG. It has scale (it's one of the world's biggest), international presence and no one shareholder has a big enough holding to block an advance. The snag is that the shares have climbed 27 percent from early February and now trade on a forward earnings multiple of 20.
But this needs to be put in the context of IHG shares suffering particularly badly last year. So the uptick has merely restored the price to earnings valuation to where it was a year ago, and is only a 2 percent premium to the European sector, based on Bloomberg data.
The European sector may no longer be a bargain -- but it is hard to say it has gone beyond the reach of bidders.
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