• Accor Booster to fund share buyback, M&A

AccorHotels will raise EUR4.4bn through the sale of 55% of AccorInvest to group of investors, including sovereign wealth funds.

The company is committed to retaining at least 30% of AccorInvest for the next five years but said that, long term, it would expect to exit fully.

Following the closing of the transaction, AccorHotels intends to implement a two-year share buyback programme of up to EUR1.35bn, which represented 10% of its share capital based on current market capitalisation. Around EUR1bn will be used for deleveraging, leaving EUR2bn for M&A, half of which has already been spent on Mantra.

The consortium which acquired the stake included the Public Investment Fund (Saudi Arabia) and GIC, Institutional Investors, Credit Agricole Assurances, Colony NorthStar and Amundi and other investors. The deal is expected to close in the second quarter.

The AccorInvest hotels will be operated by AccorHotels under very-long-term contracts, namely 50 years (including a 15-year renewal option) for luxury and upscale hotels and 30 years on average (including a 10-year renewal option) for hotels in the midscale and economy segments.

Sébastien Bazin, chairman & CEO, underlined that the group would not revealed the size of each stake or the side of the level of debt pulled down into the company.

Bazin told analysts: “AccorHotels does not intend to hold any residual shares in AccorInvest. In five or 10 years we would not want to have any equity component of AccorInvest. One has to wonder whether we want hundred of millions more now? Or in a few years? We have to understand the scope of possibility ahead of any M&A activity.

He added: “These agreements represent a key milestone for the group. Following the separation of AccorInvest into a stand-alone legal entity last summer, we are now gathering a round-table of leading investors, on the basis of a valuation that fully reflects its global leadership and the quality of its assets, while building a long-term relationship between AccorHotels and AccorInvest. AccorInvest will take advantage of its new powerful shareholders’ support, as well as a strengthened financial structure to execute its roadmap and continue to reinforce its portfolio of assets.”

The CEO foreshadowed the lengthy management agreements signed by AccorInvest at the company’s fourth-quarter earnings, commenting: “I think it’s better to be 80% focused on management contracts. Put that question to an InterContinental, Marriott, Hilton, they’ll probably tell you the exact opposite, that it’s to be on franchise contracts.

“Neither one nor the other is right or wrong, it’s just very different. and you need to know that. Eighty per cent of Accor fees are generated by management hotels, it’s the opposite in our US players. Why do I think it’s better? Because they’re longer, and a management contract is between 22 to 35 years, franchise contracts are seven, 15 years. So we have clarity going forward.”

The group reported a pipeline of 900 hotels and 160,000 rooms, around 25% of the current portfolio, which it attributed in part to the rapid growth of its brand stable, which has expanded from 14 two years to 24.

During the year, the company opened 51,413 rooms, of which 94% operated under management and franchise contracts. The group ended 2017 with a hotel portfolio of 616,181 rooms (4,283 hotels) and a pipeline of 161,000 room, 78% of which were in emerging markets and 47% in the Asia-Pacific region.

Bazin said: “The group has never been so strong. By developing our ‘augmented hospitality’ model, we are at the forefront of an industry that is constantly transforming and has unlimited prospects.”

The company reported that new businesses – which included JohnPaul, Gekko and Very Chic –  saw revenue double to reach EUR100m. Like-for-like growth was 6.9% in new businesses and like-for-like includes Fastbooking and three quarters of Onefinestay. The new businesses division is planning to halve its loss in 2018 and to break even in 2019.

Looking ahead, Bazin said: “We must expand our geographic coverage, the number of brands. We will then multiply the touch points and then we must transform all this.”

Commenting on Airbnb’s move deeper into distribution, Bazin said: “I’ve always had admiration for Airbnb, I’ve never decried the company. It seems fully reasonable that they should go to new business, there’s an increase the range of offerings. Exactly what we did when we launched independent hotel distributions, same logic.

“We realised it wasn’t a good idea. We moved from 13 to 25 brands. If they can do it so much the better. If it assumes a considerable size, of course, Accor will look.”

HA Perspective [by Katherine Doggrell]: Bazin confirmed on the group’s earnings call that Accor expected to double its Ebitda within five years of the Booster plan and investors will now be looking to see whether the groups’ three pillars plan can deliver.

Announcing the sale of the AccorInvest stake, Bazin said that the management contracts would now be based on 60% of fees through profitability and 40% on revenue (vs. 40%/60% currently), with Bazin commenting that the group would focused on “better alignment and better sensitivity… it’s not capped, so if we do a hell of a job, we get more fees”. After asset-right, the company is now firmly asset-light and determined to use its geographic spread – including influence in China – and expanded brand stable to make it so.

The news was greeted by Morgan Stanley, which upgraded its target for EUR1 to EUR53 (at the time of writing the share price was EUR47), reflecting the higher-than-expected valuation of AccorInvest at EUR6.25bn. The group expected 3% to 4% annual revpar growth and 6% to 8% annual net rooms growth, with 6% to 8% fee income growth.

We’d also like to take a moment to pat ourselves on the back at Hotel Analyst for predicting, moons ago, that Bazin would sell to the sovereign wealth funds, following his sale of Paris Saint-Germain to the Qatari royal family in his pre-Accor days at Colony Capital Europe. A stretch in the land of M&A forecasting, possibly. But if it ain’t broke, don’t fix it.

Additional comment [by Andrew Sangster]: Accor is sticking to the rubric of French exceptionalism. Within the classification of global hotel brand major, there are four companies: Marriott, Hilton, IHG and Accor. Two are American and one is effectively American. And there is one that most definitely is not American – Accor.

The US players have had the advantage of a significantly more consolidated domestic market. Where Europe is just 30% branded properties, the US is nearer 70%. Accor has had to face up to the challenges of fragmentation earlier. In particular, it has proved harder to keep the OTA onslaught at bay.

But this more challenging environment may yet prove to be in Accor’s advantage. Bazin came in with an entrepreneurial zeal to transform and challenge the business. He has failed at times, as with Accor marketplace, but he has had the charisma and drive to keep his teams trying new things.

It is far from clear that his initiative to offer local hospitality beyond his hotels is going to work. It is particularly hard to see how Accor will make money offering such services.

But we do know that Bazin understands hotels must offer more than the basics. He has grasped the need to offer travellers, including business travellers, meaningful experiences.

The secret sauce may yet prove to be his focus on management. It gives Accor a control that his Big Four rivals are increasingly abandoning in favour of the narcotic-like rush of the higher returns from franchising.

Management is a defensive moat against the superior retailing skills of the big online tech players, be they an OTA or a sharing economy platform like Airbnb. If you are running the hotels better than any of your rivals, and it remains in your grasp to run hotels better than any rivals, you can be distinctive on the retailer shelf.

Of course, through franchising, it is possible to maintain control of the product but it is much harder than if you had direct control. Accor is both producing the contents of the packet of cereal on the supermarket shelf and doing the deal to get its packets the right position on the shelf.

For much of the inventory of the other Big Four players, their main control is over the packet positioning and packaging. The contents of the product is going to be delivered by another entity and this looks like a big risk.

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