Starwood Hotels is in discussions to acquire the balance of shares in Design Hotels, a German based boutique hotel marketing group. The deal, which appears set to take place subject to shareholder approval in July, will give Starwood control over a global collection of 260 individual hotels with a portfolio strongly biased towards a presence in Europe.
While no one is speaking yet about plans for the future, Starwood’s logic in making the investment must be to give it considerable weight in the boutique hotel sector. Insiders suggest an almost immediate first step will be to open up Starwood’s loyalty programme, Starwood Preferred Guest, to Design member hotels: one Design executive called the scheme “the best in the world”.
The deal will be the conclusion of a process started in late 2011, when Starwood bought 49.8% of Design. The shareholding was made available as holder Arabella Hospitality opted to refocus its business on ownership and asset management. At the time, Starwood managed 20 of Arabella’s hotel properties.
After a two year courtship, it appears Starwood now sees merit in taking over Design, which brings a membership of the 260 hotels, along with a European office focused on a range of marketing and support services for its members. A “domination agreement” under German corporate law is being agreed, which will see Starwood pay an agreed sum for most, or perhaps all, of the outstanding 50.2% of shares in Design.
Setting up a domination agreement will have involved Starwood seeking assurances that it will gain a minimum 75% acceptance from existing shareholders. The company is paying EUR2.25 per share, which means an outlay of up to EUR10m to acquire the outstanding shares.
At the time of the initial investment, Starwood CEO Frits van Paasschen commented: “This is an investment presented to us by a longtime partner. With our own passion for design and innovation, we have long admired Design Hotels, its founder, CEO Claus Sendlinger, and his executive team, who have worked closely with some of the world’s most exciting independent hotel owners to curate a unique collection of hotels around the globe. As a shareholder, we are delighted to have a seat at the table of this dynamic company.”
At the time, the pair declared that the Design Hotels portfolio would continue to operate independently of any Starwood marketing activities, such as its Preferred Guest programme.
“Having Starwood with its leading global footprint and lifestyle brands as an investor is a further validation that Design Hotels is a strong brand of global relevance as we continue to grow and focus on our niche in the New Luxury hotel segment,” said Claus Sendlinger. “Furthermore, Starwood has a keen appreciation for what makes Design Hotels distinct and special, and that is the creative spirit of our visionary hoteliers.”
Design had revenues of EUR13.75m in financial year 2013, up 9% on the previous year. Ebitda was EUR1.43m, with the company’s income split 24% from membership fees, 47% from booking commissions and 29% from marketing and consulting services. It ended 2013 with 268 member hotels, up from 249 a year previously.
There’s no official word on any amalgamation, and in a statement the company said of the latest move: “We are thrilled to be the majority shareholder of this dynamic enterprise that is so unique in its niche. We believe in the power of the Design Hotels brand, as well as in the expertise of Design Hotels’ founder and CEO, Claus Sendlinger, and his executive team, and we look forward to strengthening our relationship. Starwood is not involved in the day-to-day operations of Design Hotels.”
HA Perspective [by Chris Bown]: This has been a slow dance, but Starwood’s wooing of Design Hotels is set to deliver a useful addition to its business. The Design Hotels operation brings with it a core of luxury independent hotels across Europe, with others in Asia, the Middle East and North Africa, with very few in Starwood’s home US market.
Expect the Design Hotels portfolio to be swiftly included within the Starwood Preferred Guest loyalty programme. This will give SPG members access to a new range of more individual hotels, around the globe; and Design member hotels will enjoy access to Starwood’s high spenders and regular travellers.
Expect, too, the Design Hotels brand to remain in place in the long term. The company’s management is well aware that a corporate rebrand could upset its member hotels, who signed up for brand support, not a corporate straitjacket.
In retrospect, the opportunity presented by Arabella in 2011, to buy a major stake in Design in an uncontested transaction, looks a fortuitous one, with Starwood picking up the brand and management company for less than EUR20m. The affiliation brand, if carefully managed, provides a useful additional flag for Starwood, alongside its existing Luxury Collection of some 100 hotels. In the medium term, management will doubtless be thinking about how to combine the two; however, one issue may be fees. Design Hotel members pay on average little over EUR50,000 a year for their membership, booking commissions and marketing support. In contrast, brands such as Marriott’s Autograph generally expect to receive a more substantial 10-14% of gross revenues from their boutique hotel signings.
Other affiliation brands are available, and Starwood will need to be careful in allying its corporate branding with the members of the Design portfolio, so as not to scare them off; surely, for some, the whole point of joining an umbrella brand such as Design Hotels, was in order to avoid their business being subsumed by a major group. Independent umbrella groups such as SLH and Preferred will no doubt be standing by.