• Talking takeovers

Takeover talk is at the top of the agenda of many public hotel companies at present with the list of those groups that might be vulnerable growing by the day.

The past week has seen both Hilton and Starwood talked up by excited traders with Orient Express now also firmly in the frame, partly as a result of the Four Seasons bid and partly as a result of the impending retirement of founder James Sherwood.

The number of listed European hotel groups with rumours around them is just as impressive, with Whitbread and InterContinental heading the line-up.

There is a clear distinction between hostile bids and managements who are jumping rather than being pushed: a take-out versus a take private.

Four Seasons is clearly a move that has come from the majority vote holder, founder Izzy Sharpe. And other take privates have nearly all been done with the support of management, even if, as with De Vere, it was under some duress.

Where managements have been able to create a credible long-term strategy, shareholders seem prepared to hold on for the ride.

At both Whitbread and InterContinental there has been willingness by investors to wait and see how both businesses look after restructuring.

This does not mean that incumbent managements are safe: Whitbread in particular has some tough talking to do in 2007 with Starwood Capital breathing down its neck.

There is a convincing growth story with Premier Travel Inn: Whitbread is aiming to take its room stock in the UK from the current 30,000 to 45,000 by 2010. Last month’s investor day presentation specified that two-thirds of this growth – 10,000 rooms – is to come from new-build or conversion of existing stock. The remaining 5,000 is to come from bolt-ons to an earmarked 100 or so pub restaurants or extensions to existing hotels.

Costa Coffee too is a good story, although its small scale and lack of synergy with hotels does call into question why it needs the embrace of a big corporate. And even less understandable is the wish to retain the health club operation David Lloyd Leisure.

While Whitbread is currently singing the praises of DLL it is mostly in the context of a “turnaround”, and promises to keep the roll out of new builds in the UK under control and to churn the handful of continental European sites.

If Whitbread remains in the throes of reorganisation, InterContinental has largely done what it needs to do. The past week has seen press speculation that the recently built InterContinental in Buckhead, Georgia, in the US, will be placed on the market. It means InterContinental will be living up to its promise of divesting all but a handful of core InterContinentals – in London Paris, New York and Hong Kong.

For InterContinental it is the challenge of delivering on its growth promises. But unlike Whitbread, it now has comparatively few property assets that will attract private equity buyers.

In contrast, Whitbread still owns almost all of its Premier Travel Inn estate and its pub restaurants and 50 of its 62 DLL clubs are freehold. The arbitrage on the valuation of property held within a listed company and that held privately remains all too tempting.

It is a similar attraction for New York listed Orient Express which owns 24 of its 48 hotels.

But something odd is afoot across the Atlantic, with the multiples on private market transactions in all property classes now moving further behind the implied multiples on the property held within REITs. (Unlike conventional property companies on the stock market, REITs typically trade at a premium to net asset value rather than a discount).

In other words, investors in the public companies are betting on further property price rises. REIT investors have moved ahead of what is currently being paid in deals in the property market and have factored in where they believe the multiples will be in a few months or years down the track. It is a reverse of the arbitrage situation that saw the rash of take-privates.

In the absence of REIT-type vehicles in the major economies of Europe (France excepted), this trend is much harder to detect. But the run-up in share prices of companies like Whitbread must be at least partly due to the growing realisation of the property value hidden within these companies.

In the absence of any valuation gap, private equity buyers of public companies are taking a brave punt on how much further property prices are set to climb and / or the potential to reorganise the operation to deliver more return. This may well slow or even stop the takeover trend, at least among private equity buyers.

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