M&A in Hospitality: Stick or Twist?
By Stéphane Haddad, Senior Lecturer at EHL
What's the outlook for mergers and acquisitions (M&A) activity in the hospitality sector in 2018? We saw deals peak a few years ago in 2015, not in the number of deals as such – they have continued to grow – but rather in the value of the transactions. Landmark deals involving the Marriott's acquisition of the Starwood group and Accor's purchase of Fairmont Hotels & Resorts helped push the value of deals that year to some 200.3 billion US dollars.
So what can we expect in 2018?
Will we see a continuation of the more measured pace of activity witnessed over the past two years or will we see, as in 2015, a year of high-level consolidation among the leading international hotel groups?
For that, let's examine the current environment to identify what the key factors are right now:
1. The hotel sector continues to trend upwards in terms of operating and financial performance. 2018 should see another year of growth in occupancy, average daily rate (ADR) and profits. However, new projects and openings will undoubtedly impact existing participants and lower growth prospects over time;
2. Large transactions such as the 2015 landmark deals mentioned above still need to deliver full synergies. This may prevent a number of hotel groups from making further sizeable transactions, as they continue to focus on driving operating efficiency up;
3. In line with the overall equity markets, hotel company valuations are currently high and investors are becoming more risk averse. On the other hand, high stock valuations may lead to mergers between participants if the transactions involve shares;
4. While credit is still largely available for acquisitions in the sector, the prospect of interest rate increases in the near to medium term will undoubtedly limit the enthusiasm for raising debt levels in any acquisition plan.
In conclusion, the likelihood is we will see the current trend continuing, rather than another major wave of consolidation among the top players. Hotel operators will seek to expand their portfolios through targeted acquisitions of smaller regional chains. Accor's pending acquisition of the Mantra Group is a good example of the deals to come.
Stéphane is a senior lecturer in finance at Ecole hôtelière de Lausanne. He advises industrial and financial participants in corporate acquisitions, disposals and JV projects within the construction and real estate industriesMore from Stéphane Haddad