Deals

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Could Australia's beleaguered hotel sector be on the brink of a new dawn? Accor SA certainly thinks so.

Its proposal to buy Mantra Group Ltd., announced Monday, gives a seemingly accursed business its best valuation in a year. At a diluted price of A$3.96 ($3.08) a share, the deal implies an enterprise value of about A$1.24 billion, some 11 times its forecast Ebitda over the 12 months ending next June.

Discount Down Under
Mantra's EV/Ebitda ratio has jumped on an offer from Accor, but still falls short of international peers
Source: Bloomberg

That still short of multiples in the local and global hotel industry -- but it's a substantial improvement on most of Mantra's history.

The core of the business was built up by local asset manager MFS Ltd., which estimated the group was worth about A$2 billion in 2007. When MFS sold a 65 percent share to CVC Asia Pacific Ltd. as it struggled to avert bankruptcy, the A$409 million price implied a value less than a third of that amount.

CVC might have thought such a discount meant it had picked up the hotels for a bargain, but the deal turned out to be a dog. By the time the unit crawled to an initial public offering in 2014, the A$449 million market capitalization implied a further 29 percent fall in value. By selling during the shares' run-up toward the end of 2015, CVC and UBS Group AG would have recouped much of their lost ground, but they'd still have struggled to make a capital gain.

Travel Trouble
Australia will see the weakest pace of growth in Chinese tourists between 2015 and 2025, according to Goldman Sachs
Source: Goldman Sachs, Gadfly calculations

With its combination of sun-kissed beaches, spectacular scenery and proximity to Asia, Australia's relative underperformance in the tourism industry is something of a mystery. While Goldman Sachs Group Inc. forecasts that visitor numbers from China will double in the decade through 2025, that's the second-slowest pace of growth among 10 regions surveyed by the bank, and starts from the lowest base.

Part of the explanation for this probably lies in the poor quality of Australia's hotel stock. The country's relative isolation, combined with its eye-popping real estate prices, make it a tough market for lodging investors, and while much of the Asia-Pacific region has been busy building new properties to attract overseas tourists, Australia is stuck with a collection of aging and overpriced destinations.

Holiday, Celebrate
Ebitda from Mantra's city center hotels has stood still for five years while resorts have grown
Source: Bloomberg

Mantra is in many ways a symptom of this trend. Most of its earnings growth in recent years has come from its resorts business, whose properties are mostly owned by outside investors. The company manages these properties under its own brand and splits the proceeds with the owners. That's been a good, if lower-margin, business for Mantra -- but it's meant management has largely stayed away from the more risky business of developing new markets by investing in eye-catching destination hotels like those that have been sprouting up in Singapore, JapanBali and elsewhere.

Long Stay
Visitors to Sydney spend by far the longest time versus other destinations
Source: Mastercard, Gadfly calculations

Should Accor choose to take things in a more entrepreneurial direction, there's ample opportunity to make a silk purse from this pig's ear. To date, Australia has done well from China's outbound travel boom largely in spite of its high prices, dismal hotel stock, and isolation. But once tourists have made it all the way Down Under, they're a captive market: While the average visitor spends less than a week in most Asian destinations, Sydney gets a three-week visit, according to Gadfly calculations based on Mastercard Inc. data.

That suggests there's much to be gained for those prepared to invest in delighting foreign tourists rather than clipping the ticket on their overnight stays. Should Accor be up for the challenge, this deal doesn't look too pricey at all.

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

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net