InterContinental formally started the final leg of its disposal marathon yesterday with the marketing of seven upscale EMEA properties and a portfolio of midscale hotels, also in Europe.
But while investors welcomed the news, pushing up the share price slightly, analysts in the City began adding a few more pence to their target share price to account for a takeover premium.
The hotels being put on the market are InterContinentals in Amsterdam, Budapest, Cannes, Rome, Frankfurt, Madrid and Vienna. Together with the midscale properties the net book value is around £600m.
InterContinental said that the upscale hotels are to be a sale and manage back while it also hopes to retain its brands on the midscale properties. EBITDA from all the hotels was Eu67m.
The sales process, being conducted jointly by Jones Lang LaSalle Hotels and Merrill Lynch, is expected to take up to nine months.
The latest disposals means that InterContinental will have sold or is selling 176 hotels with a net book value of £2.8bn since it started its divestment strategy. In addition, it has netted £370m thanks to the IPO of soft drinks business Britvic, in which it had a stake.
So far, shareholders in InterContinental have received £1.95bn in cash from these disposals and another £300m is earmarked. More returns are expected with analysts at ABN Amro predicting £750m will head shareholders way during 2006. They estimated that net debt at InterContinental was only £150m at year end.
Once the current slug of assets is sold, InterContinental will be left with its six core properties (London, New York, Paris, Hong Kong, Atlanta and Boston) plus a further 48 hotels that are likely to eventually be sold. ABN Amro puts a £700m valuation on these assets, split £85m in the Americas and £615m in EMEA (just one hotel is in Asia Pacific).
Factoring all this in means InterContinental may well have handed back £3bn of cash to shareholders by the end of 2007.
This new look, asset light InterContinental is an attractive target for rival operators. The interest of both Marriott International and Starwood Hotels has been much documented.
But it is not just the absence of property that is appealing for these operators: it is the still substantial cost base embedded within the InterContinental organisation that presents an opportunity.
A trade player would find it easier to unpick these costs and deliver the much sought after synergies post takeover. According to ABN, the costs currently have a negative economic value of £1.5bn.
The ambitious growth targets imposed by former Cadbury-man Andrew Cosslett on his arrival as CEO will, if achieved, help to spread these costs. The issue is whether he can deliver this growth given the company's dismal past record and whether he will be given the time to try.
System growth is also vital if InterContinental is not to be the ever shrinking company. Net income fell about 19% and sales about 10% last year, estimate analysts at UBS, thanks to the property sales.
Assuming InterContinental is still an independent company in a couple of year's time, the other issue that will no doubt raise its head is why bother retaining even the six trophy properties as well.
Perhaps InterContinental could retain a small stake to prevent its flags being lost but still free up much of the £1bn tied-up in these assets. Given that the return on invested capital in owned and leased hotels will be just 2.3% during 2006, according to ABN Amro estimates, there needs to be a very convincing argument for retaining any property at all.
In the meantime, InterContinental has the tough job of convincing its shareholders to hang on. At its birth in March 2003 when it was span out of Six Continents, it fought-off an audacious takeover attempt from Hugh Osmond.
Any move made in the year ahead might not be such a straightforward task. Most City brokers currently have InterContinental as a buy recommendation, almost all factoring in a takeover premium.
The InterContinental share price is currently heading towards 900p (it was 859p on Tuesday), close to or even above the target price for many brokers.
But ABN Amro reckons 1150p is not an unreasonable level were a trade bidder capable of exploiting cost synergies to emerge. Not many investors are going to hang on if a bid comes in at that level.