• Accor digs in but remains opportunistic

Accor has come under fire for a board revamp that saw its chairman and five other directors quit in protest.

But the economic challenges facing the company make the fears outlined by the refuseniks unlikely to happen in the short-term. Instead, Accor is digging in for a deep recession that might throw up growth opportunities.

The board changes see a 17-strong board slimmed down to 13 but, apparently of most concern to those resigning, was the increased presence of representatives from Colony Capital and Eurazeo, private equity investors who now have a joint stake of just over 30%.

According to the exiting chairman Serge Weinberg, there was a risk of decisions being pushed through by "shareholders with a determining influence" who had "elevated debt levels" – neither Colony nor Eurazeo were named – that were not in the interest of other shareholders.

Specifically, the fear was that the hotels and vouchers businesses would be separated, or there would be some other forced divestments, under pressure from both Colony and Eurazeo. The number of directors from the pair on the new board is increasing from three to four.

Weinberg also complained that by combining the role of chairman and CEO, the independent directors would no longer be able to do their job. The resignation last week follows Weinberg's warning last May that Colony and Eurazeo might mount a creeping takeover.

His hostility to Colony and Eurazeo made his position increasingly untenable. As for the other five directors, all were due to have their terms renewed and thus could have decided to jump before being pushed.

CEO Gilles Pelisson brushed aside Weinberg's complaints stating that the board changes fully complied with the code of corporate governance produced by French business organisations AFEP and MEDEF.

He added that many other organisations had combined the role of chairman and CEO. The reforms were necessary to create more responsiveness from the board in light of the current "extensive and deep" economic crisis.

Accor is no stranger to corporate governance controversy. The appointment of Gilles Pelisson at the start of 2006 was greeted with some alarm because he was the nephew of Gerard Pelisson, one of the two co-founders of Accor.

The furore at least partly led to the installation of Weinberg into the role of chairman to placate some investors.

Despite the high profile resignations, most investors seemed to brush off the controversy as a hissy fit at the intervention by outsiders into a previously cosy French establishment.

The one major concern – especially for observers with an Anglo-Saxon business heritage – was the combined role of chairman and CEO.

Anna Barnfather, analyst at US investment bank Jeffries International, said streamlining the board made a lot of sense. She did have concerns that the role of CEO and chairman were being merged but she did not think the changes would lead to a change in strategy.

A quick look at Accor's second half EBIT numbers indicate why splitting off the vouchers business does not make a lot of sense right now. While profits from upscale and midscale hotels were down 10.8% and economy hotels in the US saw profits tumble 23.1%, prepaid services saw profits rise by 19.4%.

The voucher business is thus seen as a key bulwark against the current downturn, along with European economy hotels which had a flat performance in the second half.

The pre-paid services division was about 40% of EBIT in 2008 and economy hotels in Europe a further 30%. Economy hotels in the US were just 7% of EBIT and upscale and midscale hotels were 23%.

And while the return on capital employed went backwards for all three of the above hotel divisions, it surged to 23.3% for pre-paid services, moving ahead of European economy hotels which delivered a ROCE of 21.1%.

The outlook for this year is for a worsening in these and many other ratios. Finance director Jacques Stern said during a conference call last week for the full-year results that the trend during January for the US was a decline of 8%, double digit negative in Spain and down 12% in the UK for mid scale hotels.

Stern predicted, however, that both France and Germany would prove resilient. Accor unveiled what it called "a battle plan to face a difficult environment".

The differentiated pricing policy previously announced was reiterated. Where Accor is the market leader – in France, Germany, Belgium, Luxembourg, Switzerland and Austria which is 60.5% of hotels EBITDAR – prices would be held and online promotions used.

In countries like the UK where Accor was a challenger for market leadership it would take the lead of its rivals in terms of pricing.

This year it is taking out Eu75m from overheads and a further Eu25m next year. It cited reduced marketing spending by the withdrawal of sponsorship of Olympique Lyonnais football club which saves Eu9m and the ending of contracts to sponsor the Olympic teams of France, Australia and New Zealand, shaving a further Eu1m.

Also, about Eu10m is being saved by renegotiating deals with suppliers over the next two years. And further savings are coming from the cancellation or postponement of non-priority projects in areas such as new rooms, distribution and IT.

Renovation capex is also being chopped with the Eu515m budget of 2008 being reduced to Eu365m next year. If the economic situation continues to slide then these cuts may be increased.

However, expansion capex for hotels is being maintained at Eu500m for both 2009 and 2010 before shrinking to Eu400m by 2011 onwards. All of this reduction is in midscale and upscale with more being spent on economy hotels.

During 2008, 28,000 new rooms were opened giving Accor 479,000 rooms at the year end. The new rooms were predominately economy (60%) or midscale (29%) and just 21% was owned or fixed lease.

This year, the rooms opening target is 30,000, for 2010 it is 35,000 and thereafter a bullish 40,000. The pipeline was 101,000 rooms at the year-end.

All this expansion is aimed at making Accor the global leader in economy and midscale hotels.

The company described three growth levers: it portfolio of brands which had now completed its repositioning; an asset right property management strategy; and growth aligned with global demand.

In terms of asset right, Accor reckons it is 60% of the way through what it wants to do having pushed 56% of the hotel base into management contracts, franchises or variable leases.

Still to be done are more than 600 hotels, including Formule 1 in France and Motel 6 in the US, in what Accor admits is a more challenging property market.

The one new bit added to its strategy statement was a possible shift into acquiring hotel properties rather than building them. To these ends, Spain and the UK were put forward as territories where there could be opportunities.

The low debt at Eu1.072bn and the Eu600m bond issue in January gives Accor "enough financial latitude to go for a good deal," according to Pelisson. The unused lines of credit total Eu1.5bn.

The recession was still at its beginning, said Pelisson, and there would be opportunities to buy both individual hotels and groups.

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