Shares in InterContinental Hotels Group rose by almost 6% as rumours circulated about a possible takeover of the group.
The company is thought to have turned down a GBP6bn offer, with speculation suggesting that a bidder could have viewed a deal as route to a more tax efficient structure in the UK.
IHG has so far declined to comment on the move.
Rumours of a takeover originating in the US have been picking up pace in the sector since the International Hotel Investment Forum in Berlin this March. Reports of this latest rumour have suggested that the move was made by a US-based investment fund, but was rejected by IHG as too low. At the time of going to press IHG’s market cap was GBP5.89bn.
IHG is thought to be expecting a higher bid, either from the same source or from a rival operator, with some media sources identifying Starwood Hotels & Resorts, which has a market cap of USD15.18bn. The appeal of such a move for the operator is thought to lie in the prospect of moving its tax domicile to the UK in a process known as a tax inversion. This would allow it to avoid paying tax on its overseas cash holdings.
In contrast, the same week saw shares in AstraZeneca fall by 11% after US rival Pfizer said that it would not increase its bid for the UK-based group. As with the rumours around IHG, Pfizer had hoped to re-domicile the merged firm in the UK for tax purposes.
Both Pifzer and IHG’s rumoured bidder must make a return bid with reasonable speed – a bill was introduced on 21 May in the US which would help close the loophole, as it includes a rule that the merged company could not be treated as a foreign company for tax purposes if the shareholders of the US company continued to control it.
As previously reported in Hotel Analyst, IHG’s shareholders are set to benefit from recent sales, with CEO Richard Solomons announcing a USD750m special dividend at the group’s first quarter results, which he said reflected “our clear capital allocation strategy whereby we are committed to returning surplus funds to shareholders, whilst maintaining an efficient balance sheet and continuing to invest behind growth”.
He added: “In line with our strategy to continue to reduce the capital intensity of the business, and given the strength of the global demand for prime hotel assets, we are now reviewing our opportunities for further asset disposals”.
The announcement of the special dividend raised the total amount of cash returned to investors since the company’s demerger from Mitchells & Butlers in 2003 to USD10.3bn. With investors already in the company’s good books, the group will need a strong incentive to sell.
HA Perspective [by Andrew Sangster]: Marcato Capital, the activist investor which is the most likely source of the bid rumours, wants to see IHG’s management put the company formally up for sale. Mick McGuire, Marcato’s founder and managing partner, said: “We believe that a combination with a larger hotel operator would have compelling strategic and financial merit and represents a unique opportunity to reshape the global hospitality industry.”
Much of this is true. But the evidence suggests that such mergers are value destructive for the shareholders of the acquiring company.
The most often tipped merger partner is Starwood Hotels. Indeed, almost a decade ago Hotel Analyst was reporting on such a combination. The logic is that while Starwood is weak in midscale and economy, IHG is weak in luxury and upper upscale. Combined there is a chain with strength across the segments.
Were Starwood to mount a bid – and there is scant evidence it is considering it – it seems unlikely to be for tax reasons. The cited example of Big Pharma does not read across for the hotel industry as the latter is very much in growth while the former is desperate to find ways to cut costs to maintain earnings growth.
The bid is a challenge for IHG, however. It has to decide whether to keep funneling cash back to shareholders or to invest in the growth it says is obtainable in the industry. IHG can keep growing and handing back cash but the question of whether faster growth can be obtained by investing more is not going away.