• Accor set to divest more

Accor, in a huge about face of its position less than a year ago, is to aggressively pursue an asset right strategy that will see it shed the property interests in up to almost 1,100 hotels.

During its half-year results presentation held last week, the company committed itself to selling more than Eu3.2bn worth of property and lease commitments in 535 hotels with the potential to sell an additional 550 hotels.

Perhaps the most surprising announcement was its decision to place the Red Roof Inns US economy hotel chain under “strategic review”. By signalling the possible sale of this brand, the company is demonstrating its determination to sort out its underperforming US operations.

The 867-strong Motel 6 is number three in the US market and has nationwide coverage but the 337 hotels in Red Roof are just number six in the market and have only regional coverage.

Accor says it wants to take advantage of currently attractive valuations and “favourable financial momentum” of the chain.

Just as dramatically Accor has finally admitted what many have been saying for years about the Sofitel brand – that it is too stretched across different market levels. The chain is to be repositioned into three segments with just 10 properties qualifying as luxury, a core network of 120 classified as upper upscale and some 50 properties to be, in Accor’s words, “downgraded to upscale”.

The heartland economy, budget and mid scale brands – Formule 1, Ibis and Novotel – are to be given a makeover as well that will see pan-European multi media ad campaigns. The second half advertising and sponsorship budget is worth Eu25m.

Furthermore, Accor is to create a new, non-standardised economy brand in Europe that it hopes will persuade independents two-star operators to take a franchise. Its existing Mercure brand, which likewise targets conversions, is to be edged up firmly into the mid market category. Some properties will presumably adopt the new brand, temporarily dubbed Z by Accor. The launch in France is scheduled for next year.

Sitting alongside this brand shuffling, is the intention to shift out of property ownership. The past 18 months has seen Eu725m of sales which has also taken a further Eu925m of off-balance sheet commitments away thanks to the move into variable leases.

Already announced is a further Eu975m of sales which again reduces off-balance sheet commitments, this time by Eu1.2bn.

New promises amounted to sales that will deliver a further Eu650m in cash and another Eu400m in reduced off-balance sheet commitments. And this all adds up to almost Eu5bn with more than Eu3.2bn still to come.

The additional 550 hotels that may be sold in 2008 and 2009 comprise 140 Formule 1, 10 Suitehotels and 400 Motel 6.

By 2009, Accor wants to see less than 12% of its Sofitel portfolio either owned or on fixed leases, down from 51% in 2004. Mid scale is to reduce from 55% to 24%, economy from 71% to 27% and economy in the US from 87% to 39%. Accor said its wants a hotel portfolio that is less capital intensive that is “asset right”.

The company reiterated its plans to open 200,000 rooms by 2010, with just 32% owned. The focus, with 60% of openings, would be emerging markets with the so-called BRIC countries – Brazil, Russia, India and China – accounting for half of these.

The cost of these plans is Eu2.5bn, with Europe taking Eu1.2bn, emerging markets Eu1.1bn and elsewhere Eu200m. The target ROCE is 15%. Alongside property, Accor is also shedding more than Eu500m of what it calls non-strategic investments. This is on top of the Eu660m it has already sold-off comprising its Compass, Club Med and Carlson Wagonlit stakes.

Likely to be sold are Accor’s 60% stake in package holiday company Go Voyages and Italian catering company Gemeaz Cusin. On-board catering and other restaurant activity is also set for the chop.

Less clear is the future of the 35% stake in casino business Groupe Lucien Barriere and Accor says it remains wedded to luxury restaurant outfit Lenotre.

The additional Eu500m would be returned to shareholders pledged Accor. But analysts at Jeffries International estimate that a further Eu1.4bn might be returned if the property disposals proceed as expected, although Accor’s determination to retain a BBB credit rating may limit this and force it to pay down more debt instead.

City analysts were overall impressed with the numbers. Jeffries raised its price target to Eu60 as did Morgan Stanley. Deutsche Bank upgraded to a buy and increased its target price to Eu56 from Eu48. ABN Amro was more sceptical, arguing that full-year profit guidance of Eu680 to Eu700m might be an attempt to “low-ball” the market, despite this being a 20% increase on 2005.

Net profit in the first half was up 54.3% to Eu241m, EBITDAR was up 12.1% to Eu969m and sales up 8.4% to Eu3.69bn.

 

HA Perspective: this has been a far more rigorous strategic review than was expected given new CEO Gilles Pelisson’s first remarks on taking up the reins nine months ago when he implied that it would be business as usual under his watch.

The stand-out is obviously the asset sales but he has also grasped the need to make changes to his brand structure, including – at last – spending more on advertising, although this remains pitifully low compared to rivals outside the immediate hotel sector, notably the online intermediaries.

With the asset disposals he may well find that, as with InterContinental, whetting the taste buds of investors only increases their appetite. Asset right might soon become asset light.

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