• Accor to split in two

Accor is "just about convinced that we could have two separate companies" said CEO Gilles Pelisson at the group's half-year results presentation.

But the split into a focused hotels operation and separate vouchers business looks more like a racing certainty.

Speculation has suggested that pressure from shareholder Colony Capital and Eurazeo, which together own 30% of the company, has finally borne fruit. But this pressure has been applied for some time and the decision to act now is more likely due to perceived opportunities in the market.

Indeed, the results presentation put it: "Acting today would ensure that the two businesses were ready for the economic recovery".

The timetable suggested by Pelisson was that detailed plans will be unveiled in six months at the February full-year results presentation. Most likely, the two businesses will be separated into two independent listed companies.

The idea is that by separating out, the conglomerate discount attached to Accor's share price would be removed and the services arm in particular would be more strongly valued.

In fact the news that a separation was being considered sent the share price up more than 11% at one point on the day of the announcement despite the simultaneous unveiling of difficult trading figures.

According to Accor the objective of the split is to "improve the performance management and optimize the allocation of financial resources to support their respective strategies".

The claim that the separation would give the new entities direct access to capital markets suggests recognition of the inherent discount in the share price inherent in the existing conglomerate structure.

On the hotels side, Accor said it wanted to "build a world leader strategically focused on the economy and midscale segments, while covering the range from budget to upscale".

This means, admitted Pelisson, that the upscale Sofitel brand will "not be the group's main focus". He went further by suggesting that he could imagine Accor might sell Sofitel although he added this was not the main purpose.

What is certain, however, is that Accor will not be using its balance sheet to grow Sofitel and will continue its push to sell the property assets to release cash. Accor said at its investor day at the end of last year that there were 14 Sofitels or Pullmans marked to be switched from an owned or fixed lease arrangement. At the half-year there were 17 owned Softels out of 126 properties.

The hardening of the Sofitel brand has seen 56 hotels depart out of the total portfolio of 172 as it stood at the end of 2007. The target announced at the investor day was for 170 Sofitels by the end of 2012 which included 65 from development. How achievable that number now is might be questioned.

Also mooted in some quarter is a disposal of the struggling Motel 6 business. At this point such a move seems unlikely. It would represent a significant retreat from global ambitions and leave Accor as primarily a European company with significant emerging market exposure.

That said, Accor demonstrated no emotional attachment to the similar Red Roof and the budget focus of Motel 6 is not as core as a chain of economy hotels in North America might be.

And Motel 6 has been a serial under performer. The first half saw EBITDAR (EBITDA with rent payments also excluded) down 27.6% on a like-for-like basis. Revpar was down 12.8%.

What is near certain is an ongoing push to sell the owned estate and switch out of fixed leases. Accor has earmarked 400 Motel 6 properties for "restructuring". Motel 6 had 329 owned units and 321 on fixed leases out of its 968-strong portfolio at the half-year.

In contrast, Accor's economy hotels showed firmer resistance in Europe with EBITDAR down 13.2%, like-for-like. France, the biggest portfolio, was the strongest performer with revpar actually up 0.1%. Germany, the second most important European country, had been showing resilience but the first half showed a 8.1% decline in revpar. Spain remains the hardest hit country with a drop of 26.9%.

 

HA Perspective: How much Accor has been pushed into making the decision to split is open to question. Regardless of the motivation, it looks like the sensible move and inside Accor most people regard it as foregone conclusion.

The one hesitation has been the cash produced by the vouchers business which has been used to finance hotel development. This worked out at around Eu850m in the past year.

But this is not entirely bad news. In particular, it forces the Accor hotel operation to focus on its asset light model without distraction. It will bring more discipline to capital allocation which will please investors.

Looking further ahead, now that change has momentum it might be opportune to seek even more radical moves. Selling Sofitel rather than letting it whither would be sensible. As might a disposal of Motel 6.

Neither Sofitel nor Motel 6 will be absorbing much capital in the future (and indeed should be returning some through property disposals) but they both absorb management time. Maybe in the medium term this will be viewed as an unwanted distraction.

And using cash from disposals to reinvest in higher growth markets would be a sensible option for Accor. It benefits little from being a sub-scale player in a market like North America as budget brands rarely resonate beyond national territories, particularly in massive countries like the US.

There is a superficial attraction in offering a broad range of brands but Accor risks losing focus by retaining Sofitel when this brand looks destined to also remain sub-scale on an international basis.

Tough thinking is already in action: Accor's chairman and chief operating officer for the Asia Pacific region, Michael Issenberg, said last week that the company was committed to investing Eu130m in opening hotels in India although it might scale back growth in China.

This makes sense, focusing on a massive opportunity where Accor is among the first movers rather than on a big opportunity where Accor is already behind a number of players.

It would be brave, but a Europe plus emerging markets player focused on budget to upscale, would surely find the most favour with stock market investors and would leave Accor in the strongest strategic position possible.

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