Fitch: Accor Deal Mild Positive, More Hotel Consolidation Likely
December 11, 2015 10:03am
Fitch Ratings-London-11 December 2015: AccorHotels' acquisition of FRHI Holdings will improve the group's business profile by increasing its international diversification and will not affect its key financial metrics, Fitch Ratings says. The deal reinforces our expectation for further hospitality and travel industry consolidation as competition is rapidly increasing.
The three brands AccorHotels is acquiring, Raffles, Fairmont, Swissotel, have hotels in 34 countries, but their biggest presence is in North America, which currently represents just 1% of Accor's hotel portfolio. It will only make up a small proportion of the group's total hotel portfolio but it will increase the percentage of the luxury and upscale in the US from 4% to 19%. Additional hotels in the pipeline will boost growth prospects for at least the next three years.
The luxury end of the portfolio is both the most profitable and the most cyclical. But the portfolio being acquired is almost exclusively long-term management contracts, reducing AccorHotels' exposure to owned and leased high-end properties. This is in line with its strategy to target value-oriented and disciplined hotel ownership, which includes the end of expansion purely through leases. It is positive for the business profile as management contracts generally have better margins and are less capital intensive, resulting in slightly enhanced free cash flow profile at group level. They also insulate AccorHotels against the impact of an economic downturn, which can be heavy in the luxury/upscale category if the operator were to own or lease all the properties.
AccorHotels will pay for the acquisition with 46.7 million new shares and USD840m in cash. The absence of any new debt issuance, apart from some leases related to a few hotels, means the key credit metrics of FFO adjusted gross leverage and FFO fixed charge cover will not be affected. Following the transaction we expect AccorHotels will still have some financial headroom, albeit limited, at its BBB-/Stable rating.
The acquisition follows Marriott International's agreement to buy Starwood Hotels & Resorts Worldwide last month and we expect more consolidation in the sector. This is in part driven by growth and consolidation among travel and booking web sites, such as Expedia's acquisition of Orbitz Worldwide and HomeAway. Consolidation should put hotel companies in a better position to negotiate fees with online travel agencies.
Some hotel operators, including AccorHotels, are expanding their own online booking services to include other hotel groups to compete directly with the major online travel agencies. But it is unclear how successful they will be in encouraging customers to book directly with them. In a competitive marketplace we expect further benefits from access to customer-relationship management data and merger of the combined company's loyalty rewards system.
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