• Constellation shining for IHG

An affiliate of the Qatari investor Constellation Hotels Holding has bought an 80% interest in a joint venture with IHG to own and refurbish the InterContinental New York Barclay, for USD240m.

IHG will retain a 20% stake in the hotel and will contribute towards renovations at the site, the cost of which were thought to have held up previous efforts to sell the property.

Constellation Barclay and IHG have agreed to invest through the joint venture to refurbish and extend the hotel from 2014, in a project expected to last about 18 months. IHG estimates the work will cost around USD175m. Under the terms of the arrangement IHG will contribute 20% of this.

Once the refurbishment is complete, management fees are currently expected to be around USD7m pa.  In addition IHG will receive a share of profits or losses under the terms of the joint venture arrangement.

The deal values the hotel at USD300m prior to refurbishment. In 2012 the hotel generated revenues of USD75m and EBIT of USD16m. IHG has secured a 30-year management contract on the site, from this year, with two 10-year extension rights at IHG’s discretion, giving an expected contract length of 50 years.

The sale follows that of the InterContinental Park Lane last year, also to an affiliate of Constellation, for GBP301.5m. IHG CEO Richard Solomons said that the announcement demonstrated “the enduring strength of the InterContinental brand and deepens IHG's relationship with Constellation Hotels, a highly respected owner”.

For Constellation, the deal is yet another luxury hotel for its portfolio. Last year saw it acquire, amongst others, four French luxury hotels from Starwood Capital, with Hyatt brought in as the new manager.

It is unlikely to be doing any more deals any time soon with IHG, which is no longer actively marketing any hotels. The sale of the Barclay was a protracted affair, with the company reported to have found a buyer for the site in 2011. It was rumoured that talks broke down over the potential cost of renovation.

In May last year, after the announcement of the sale of the InterContinental Park Lane, CFO Tom Singer told analysts that the company was now pushing harder for the disposal of the Barclay, commenting: “Over the last few months, we've taken the opportunity to pull together more detailed refurbishment plans. Although discussions with interested parties have been continuing during this time, we have recently started to actively market the hotel again”.

At the group’s H1 results earnings call in August last year Singer said that the sale was taking “a longer period of time to sell than we would have ideally wished”.

Singer has since left the company, reportedly for personal reasons, with IHG taking the unusual step of issuing a statement outlining the payments due to the former CFO following his resignation. He would not, it said, be compensated for loss of office, but would receive performance-related payments, the total of which remains to be determined.

Singer, who joined the company in September 2011 has been replaced by the company's finance chief for Europe, Asia, the Middle East and Africa, Paul Edgecliffe-Johnson, who joined the group in 2004 and has since held positions including head of investor relations; head of global corporate finance, financial planning and tax; and head of hotel development, Europe. He also has acted as interim chief executive for Europe, the Middle East and Africa.

Solomon said Singer “has been a strong support to me and to the business as we have continued to execute our asset light strategy” adding that Edgecliffe-Johnson “has a proven track record of delivering excellent results”.

No further word has been heard from Singer over future plans but with Edgecliffe-Johnson having tried on any number of hats at IHG, the path to eventual coronation seems clear for him.


HA Perspective: [by Andrew Sangster] At IHG’s half-year results earnings call in May, Singer said that, with regards the somewhat protracted sale of the Barclay, the group was “very much focused on doing the right deal for shareholders, which means getting the right owner involved who really understand the InterCon brand and is prepared to invest in the asset for the longer term”.

There is an interesting conflict of interest here between obtaining the best price and maintaining a fee income stream. But there are most likely a number of IHG shareholders who view obtaining the best price – and hence bigger special dividend – as the priority.

Given that IHG now has just two plum assets up for grabs – the InterContinentals in Paris and Hong Kong – shareholders wanting a pay-out are presumably jumping ship.

The past 10 years has seen IHG release USD6.2bn from the sale of 191 hotels. A total of USD9.4bn including USD1.4bn of ordinary dividend has been handed back to shareholders. The CAGR of the ordinary dividend at IHG is 11%. Maintaining this in the absence of disposals is going to be a challenge but Richard Solomons is convinced his team can do it.

Back in November, IHG held an investor day that gave a glimpse into the strategy behind this belief. Firstly, IHG thinks it has positive tailwinds driving global hotel demand. In particular, it singled out GDP growth, favourable demographics and the globalisation of travel.

It is hoping to tap into this by focusing on the top 10 priority markets which it believes will represent over three-quarters of the growth in the hotel industry to 2020. These markets are, in order of importance, the US, Greater China, the Middle East, Germany, UK, Canada, India, Russia / CIS, Mexico and Indonesia.

IHG says it has 85% of its system and pipeline in these markets. It estimates it currently has a 6% share of open rooms and a 15% share of pipeline in the 10.

The big push is in branding, and IHG has significantly more nuanced message here than is the case with its competitors. Sure, it puts up the usual stats showing a push towards branded (the UK, for example, is expected to be 69% branded by 2030, only just behind the US at 73%) but IHG sets itself apart by being much more focused on what the brands mean to customers rather than simply the price point which is the standard industry definition.

IHG lists nine different categories, ranging from wellbeing to social identity, for its brand portfolio. It is clear that it gets the risk of hotels being commoditised by, among others, online intermediaries and it is striving to create differentiation.

In the IHG brand portfolio there is considerable “white space” which has only been partly filled by the latest brands, EVEN Hotels and Hualuxe. EVEN Hotels sits in the wellbeing space while Hualuxe sits in “building business interactions” which is presumably down to its focus on f&b, a particular need for China. The brand standards for Hualuxe include a double height lobby that includes a garden and a focus on tea service that includes having tea masters: these derive from the insights of “always doing business” and “rejuvenation from nature”.

The challenge with brand segmentation has always been to retain a wide enough reach of potential guests while delivering something as differentiated and meaningful as possible. To these ends, IHG reckons there are at least 17 million travellers who are potentials for EVEN Hotels. And clearly, Hualuxe has a broad reach too given its wide definition.

The challenge for IHG is communicating its brand offerings to potential guests. Its marketing budget is already, by global fast moving consumer goods standards, pitifully small. Diluting it further by adding more brands to the portfolio is not going to help its cause.

But hotel branding has always been a more complex beast. The amount spent by hotel companies on above the line marketing (mass market communications through print and broadcast advertising) is rarely more than 1% of turnover. This is clearly not FMCG territory.

Hotels do, however, have a clear advantage in having a physical presence in what are generally prominent locations. Apple and Nike are examples of high profile brands that have used a physical presence through retail outlets as a key supplement to their branding efforts and so hotels are in good company in this regard.

It is not only about the physical property either. General managers of hotels are seen as brand managers. Keith Barr, who for the past six months has been chief commercial officer at IHG and the man charged with leading brand development, says that GMs must be “immersed into the brand”.

In the US, IHG is running programmes for the 1,600 Holiday Inn GMs to achieve just this. Kirk Kinsell, head of Americas, says he wants great Holiday Inn GMs not just great GMs. The objective is clearly to have the brand dna interwoven into all activity.

IHG is very much in for the long haul. Solomons says it takes five years to generate awareness about new brands among guests but adds that the scale and size of IHG gives it a unique advantage over its competitors. “We have changed the nature of the hotel business in this company,” he says.

“We are treating hotel brands like other sophisticated brands. Terms like midscale are meaningless. [This approach to branding] is a real part of why we are winning share. It is a big company game now,” adds Solomons.

He is right to blow the IHG trumpet on this. The company is an industry leader regarding brands. And it is taking real leadership to find a route through the traditional way hotel branding has been done.

Hotel companies could never hope to compete on pure marketing spend terms with the biggest online intermediaries who have pitched into the travel space.

The head of market research firm BDRC Continental Cris Tarrant describes hoteliers as being like the food manufacturers while the online companies are the retailers. Food manufacturers can never reach out alone to sell their products and retailers have to have products to sell.

It is a power balance with hotels fighting to avoid commoditisation and establishing themselves as offering differentiated products that can command premium pricing. Getting the complexities of branding right is an integral part of this process.


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