• InterContinental bid rumours put Accor in the frame

Bid rumours are again circling around InterContinental with the latest flurry concerning a 5% stake-building by the Barclay brothers, whose business interest already includes London's Ritz and Cavendish hotels.
   But with its break-up largely complete and an already fairly full valuation on its share price, it is difficult to see too much interest from the ubiquitous private equity buyer. Rather it is a trade buyer – probably Accor – that is the more likely, or at least less unlikely, acquirer.
   The Barclay brothers confirmed their 5% stake on Monday through a regulatory filing. It had been bought over the preceding couple of months via their Ellerman Corporation vehicle.
   The news sent the share price of IHG soaring, although it retrenched a little later that day. The rise comes on top of the 50% rise that the IHG share price enjoyed during 2006, a hike only eclipsed by Whitbread whose shares leapt 74%.
   While Whitbread spent much of last year being tipped for a takeover, the rumours surrounding IHG were more low level but, at the least, provided an underpinning to the rising share price.
   The intentions of the Barclays remain far from clear, although IHG stressed that it viewed them as just another shareholder. And this seems the most probable scenario.
   There has been some speculation that the Barclays were part of a consortium seeking to make a move but at least one member of the touted consortium, the Reubens brothers, has already gone on record denying its interest.
   An analysis undertaken by analysts at Citigroup at the end of December suggested that a takeover of IHG at a 15% premium to its then £12.98 share price would deliver an IRR to any PE buyer of just 10%.
   As the analysts pointed out, there have certainly been better times to make a swoop on IHG, notably when the share price was just 825p in August 2006.
   IHG is a stable, cash generative business – which appeals to the PE appetite – but without some reasonable prospect of above average returns, no PE house will risk turning hostile and the IHG board has no need to invite in bidders.
   There are probably just a couple of chinks in the IHG armour: its rationale for hanging on to £1bn of hotel real estate in the form of the InterContinentals in London, Paris, New York and Hong Kong is not totally compelling and the group's overheads remain large compared to many of its competitors, hitting profit.
   The latter will certainly fix itself over time, provided the group does not add bulk as it grows its system. And there could well be a softening on the \must own\ stance with regard to its retained estate.
   The most compelling case for owning IHG shares is built around the potential for system growth. The already ambitious target of 50,000 to 60,000 net new rooms by the end of 2008 may yet be ramped-up to help make the case even stronger.
   The suggestion that the Barclays have built a stake in the hope of forcing IHG to sell them one of these assets seems slightly bewildering given the amount of hotel property that has been on the market in the last couple of years.
   Perhaps it is insurance in case a predator does strike and, as in the De Vere privatisation, the Barclays could trade their votes for a sale arrangement with the new buyer. At De Vere, the then major De Vere shareholder Steve Morgan struck a side deal to buy Carden Park in return for his commitment to the eventual winning bid by AHG Venice. _
   The question remains though, who is a likely buyer of IHG? Given the already difficult case for PE buyers, a trade purchaser remains the most logical prospect with the potential of synergies to sweeten the deal.
   Historically, it has always been US groups who have been tipped as likely predators – both Marriott and Starwood Hotels have been mentioned – but increasingly whispers are pointing across the Channel rather than the Atlantic, putting Accor in the frame.
   Revpar growth in the US is expected to slow during this year, taking the momentum away from the US giants. As European revpar growth catches up, so, too, are the multiples on which European hoteliers trade. This strengthening acquisition currency in Europe coupled with a weak dollar that deters overseas purchases by US companies, means that it is in the direction of Evry, Paris rather than White Plains or Washington DC where the hoteliers in Windsor should be casting nervous glances. _Back to the beginning De Vere set to be first UK hotel REIT_The UK's first dedicated hotel REIT looks set to arrive sooner rather than later. News that Richard Balfour-Lynn has appointed Deutsche Bank to examine the prospects to list his £1.3bn of privately held hotel property as a REIT could be the first of a number of moves.
   The suggestion is that the De Vere portfolio, which includes the Initial Style conference business purchased earlier and now rebranded as De Vere, could be teamed-up with some #1bn or so of hotel property held by the Royal Bank of Scotland.
   Perhaps even more interestingly, David Michels and Brian Wallace, the former CEO and CFO of Hilton Group, are tipped as probable advisers to what would be a new hotel property goliath.
   A REIT is not the only option that is on the table and the Sunday Times article that broke the story stressed that a sale-and-leaseback (presumably a manage-back would be the preferred form) remains a possibility.
   Dawnay Shore Hotels had similarly been tipped to be edging towards creating a REIT for its own property holding. But bullish prices means that its 20 hotels are more likely to be sold outright.
   Balfour-Lynn's Alternative Hotel Group is understood to have requested details on the sale of the portfolio. The Daily Telegraph also tipped BIL International, owner of Thistle, and Piccadilly Hotels, the company formed by R20 and aAim. Starwood Capital and Dubai International Capital were also put forward as possible buyers.
   There is certainly keen interest in hotel assets at present as two deals in the last week in the UK demonstrate.
   The 203-room Crowne Plaza in the City of London was sold for £81m, £11m in excess of book value, to Grupo Statuto, the owner of the Four Seasons in Milan and the Danieli in Venice. The yield was reported as 4.7% on 2006 profits and 5.5% on 2007 profits.
   The 247-room Radisson Glasgow, meanwhile, was sold for £68m having been sold only a year ago for £52.5m. In January last year, the then buyer WG Mitchell was viewed as having paid a full price for the property which was bought off MWB.
   Now, however, Si Management, a joint venture between Sigma Capital Group and Dunedin Independent, a firm representing a syndicate of investors, has stepped in.
   Si Management was set-up to allow high net worth individuals to enter the commercial property market. Si Management expects to earn #4m in fees from the deal, its sixth major commercial property acquisition. The fifth deal saw it buy three regional Ramada hotels that are managed by Jarvis for #73m in August of last year.
   And over in the US, REITs themselves are continuing to be taken private. Last week CNL Hotels & Resorts agreed to a $6.6bn takeover by Morgan Stanley Real Estate. The portfolio comprises just eight resorts, all in the US, including three properties under Hilton's Waldorf=Astoria brand.

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