Bass Can't Get Comfortable At Holiday InnsChuck Hawkins and Mark Maremont
Not so long ago, British brewer Bass PLC was confidently talking about pouring $1 billion in cash into Holiday Inn. The goal? To spiff up the chain's aging network of 1,600 hotels. But now Bass is singing a different tune. A lawsuit it filed recently in U.S. District Court in New York claims the $2.25 billion it spent to complete the buyout of the chain from Promus Companies Inc. was a bum deal.
The suit is the latest difficulty in Bass's attempt to diversify from beer to beds--an effort it accelerated in 1987 with its first investment in Holiday Inn Worldwide. By 1990, Bass had spent $2.8 billion to fully acquire the hotel chain's brand name and franchising rights. It quickly launched a plan to stabilize and improve its core Holiday Inns, while emphasizing growth in its tony Crowne Plaza and cut-rate Express hotels.
But with the hotel business in a tailspin, those lofty goals aren't looking so good. The recession and higher airfares cut into demand. And the industry's building boom during the 1980s created a glut of rooms. "Holiday Inn is squeezed in a no-man's land," says Christopher W. Wickham, an analyst with Lehman Brothers International in London. He figures the chain is in a double bind: It has an uneven quality image with business travelers and charges room rates that some vacationers are reluctant to pay. A Bass spokesman disagrees: "The image perception of the brand is still very strong."
SOLD HIGH. Instead of being the bonanza Bass expected, Holiday Inn has become a drag on its bottom line. Revenue from Bass's hotel group fell 9.5%, to just under $1 billion, in the fiscal year ended Sept. 30. Operating profit slumped 6.4% from the year earlier, to $180 million (table). "Whether it's luck or genius, Promus sold at the absolute top of the lodging market," observes analyst Napoleon H. Overton at Morgan Keegan & Co. in Memphis.
But Bass argues in its suit that Promus got top price because it withheld critical information. Neither company will discuss the suit. However, Graeme Eadie, an analyst at County NatWest Securities Ltd. in Edinburgh, Scotland, estimates that Bass wants some $50 million to $70 million from Promus.
The brewer contends that Promus failed to disclose an ongoing Federal Trade Commission probe into Holiday Clubs International, a now-defunct unit that arranged time-share vacations at Holiday Inn resorts. The suit also cites a dispute over whether Promus may open a hotel within a mile of San Francisco's Holiday Inn Union Square.
To try to recoup Bass's investment, Holiday Inn CEO Bryan D. Langton, a Bass appointee, is boosting the basic royalty fee the chain charges new franchisees from 4% to 5% of gross room revenue. Langton also has hired former Days Inns of America Inc. President Michael Leven and put him in charge of accelerating franchise signings.
DRASTIC STEPS. But consultants and competitors contend that Bass needs to take far more drastic steps to revamp the chain's quality image. They think it ought to terminate 40% of the company's 1,300 U.S. franchisees for falling below minimal standards. Bass says it "has been concentrating on changing the culture of the business."
These days, franchisees who want to upgrade are stymied by the hotel credit crunch. That's why Darryl G. LaPointe, president of Highpointe Hotel Corp. in Gulf Breeze, Fla., and a former president of the Holiday Inn franchisee association, is asking the chain to set up a fund to provide capital for renovations.
But the recession has caused Bassto slow down capital spending plans,including the $1 billion that it had planned to put into Holiday Inn improvements. "We've moved the time scale out a bit," says the Bass spokesman. "We'll probably commit that sort of level, but over a longer period."
Boosting profits at Holiday Inn may take a lot longer. That could be trouble for Bass, which is also dealing with the sagging fortunes of its beer business. Bass remains the No. 1 brewer in Britain. But British beer sales overall fell 6% last year, and Bass's sales dropped 3.5%. Worse, Bass reported that sales in its own pubs sank a sharp 9% in the fourth quarter. Bass suffered another blow in late January when the largest Holiday Inn franchisee in the U.K. announced that it was converting its 14 hotels to the Marriott nameplate. One large American franchisee says he's also mulling such a change. News like that doesn't exactly fit with Bass's vision of a rapid Holiday Inn expansion. But as Bass has learned, the rules of the hotel game can change as quickly as the guests.
HOLIDAY INN HEADACHES LOUSY RETURN Bass PLC invested $2.8 billion to buy Holiday Inn, which last year had worldwide operating profits of just $180 million, down 6.4% from 1990 POOR PROPERTIES Some hotel-watchers say 40% of the 1,400 Holiday Inns in the U.S. are aging badly, with outdated decors, fraying carpets, and sagging beds CREDIT CRUNCH Many banks are shying away from making loans to hotels for renovations. That may force Bass into acting as a banker to extend credit to its franchisees OCCUPANCY SLUMP Thanks to a hotel-room glut and the recession, Holiday Inn's U.S. occupancy rate in 1991 edged down to 62%, vs. 63% in 1990 DATA: COMPANY REPORTS, BW