Travelodge, the second biggest economy hotel brand in the UK, has been bought by Dubai International Capital for £675m.
But this deal is a secondary buyout and means the chain will again be seeking new owners in the next three to five years.
The vendor, Permira, has done well on the investment. It bought the chain in 2003 from Compass Group for £712m and had already taken out more than half the value. Some £400m was raised following the sale and leaseback of 136 hotels and the Little Chef restaurant group that came as part of the deal fetched a further £58m when they were sold last October.
DIC has bought 291 leasehold hotels for its money, 279 in the UK, nine in Ireland and three in Spain. It said it wants to make Travelodge the biggest budget operator in London by the 2012 Olympics with more than 7,000 rooms. And it wants to see 32,000 rooms in the UK as a whole in the next five years.
“The budget hotel sector is growing and, in our view, has immense potential in the UK market,” said Sameer Al Ansari, CEO of DIC.
Other DIC investments include the £800m acquisition of attraction operator the Tussauds Group and a $150m investment in Ishraq, a company that is to own and develop 22 Express hotels in the Middle East.
The tough competition for Travelodge, which saw interest from private equity groups including Cinven, BC Partners and Starwood Capital plus serious interest from Whitbread, pushed up the multiple to an extraordinary 20 times earnings.
EBITDAR (earnings before interest, tax, depreciation, amortisation and rent) was £77.9m in 2005. But rent is a big issue at Travelodge. According to analysts at Deutsche Bank, it will be £46.5m in 2006. Last year, rent was £39.1m, just over half of total EBITDAR. And this is what lead to an EBITDA multiple of approaching 20 times.
The room count at Travelodge was 17,267 at the end of 2005 and Deutsche Bank said there was a clearly identifiable pipeline of 7,219 more rooms, mostly in higher yielding city and town locations.
While Whitbread has missed an opportunity to totally dominate the economy segment in the UK it is hard to see how it could justify paying the final price achieved.
A particular complication would have been accommodating the lease structure of Travelodge, which would have seen the annual rental payment capitalised back onto Whitbread’s balance sheet at 10 times.
In any case, Whitbread’s properties are of a better quality on average, generating EBITDAR per available room of £6,390 against £4,845 for Travelodge in 2005, according to Deutsche Bank estimates.
Travelodge has grown rapidly in the last couple of years thanks to its innovative forward funding strategy that has seen it become a darling of developers. But these deals have a built-in annual rental uplift that require the economy segment to come good on its promise to be more stable than more upscale segments of the hotel industry.
With 37 of the management team at Travelodge receiving £26m between them, DIC is going to have to work hard to motivate them further. All of the top team – including CEO Grant Hearn, chairman Keith Hammill, finance director Jon Mortimore and COO Guy Parsons – have committed to stay. It is at least three more years of hard slog they have ahead.