Bryce Elder AUGUST 22 2020

Nothing is more powerfully frustrating, to misquote Victor Hugo, than an idea whose time will not come.

One of those familiar ideas came back around this week. Hotels group Accor of France has been working on a takeover of London-listed InterContinental Hotels to create the biggest company of its kind in the world, Le Figaro reported. As yet, Accor has not made an approach, the paper said; Sébastien Bazin, the French company’s chief executive since 2013, does not think the time is right.

Similar stories had been doing the rounds in the spring, shortly before coronavirus paralysed global travel. But variations on the Accor-IHG rumour predate Marriott’s $13bn merger with Starwood in 2016 — a deal that triggered a wave of consolidation within the lodging industry. A year ago Accor was the rumoured target and IHG its pursuer. Accor was on a list of IHG merger candidates put forward in 2014 by activist investor Marcato Capital Management, when talk of US predators had created a sense of urgency to find a European champion. Yet the timing, it seems, has never been right.

Geographically, the idea makes sense. Nearly half of Accor’s rooms are in the Asia-Pacific region, meaning it would plug into an IHG portfolio with around 60 per cent of rooms in North America. The combined group would have 1.6m rooms — around 200,000 more than Marriott, split approximately equally between Europe, the Americas and Asia.

Strategically, too, a deal has its logic. Accor’s stable of brands — Sofitel, Mondrian, Ibis, Mama Shelter — has a balance of rich and edgy to fit almost any neighbourhood. The IHG approach is much narrower — Holiday Inn and Holiday Inn Express make up most of its estate — but it offers superior growth prospects thanks to its early-mover advantage in Greater China, which accounts for 15 per cent of rooms and 30 per cent of its pipeline.

Cost cutting is another justification. Jefferies analysts estimate expenses synergies of between €100m to €150m, equivalent to about 7 per cent of the enlarged group’s predicted operating earnings for 2022.

IHG also offers experience managing franchises and partnerships rather than owning the real estate, which matches Mr Bazin’s favoured model. Under his tenure Accor has sold and leased back nearly all of its property. IHG’s long embrace of the same asset-light model meant it could navigate the great financial crisis better than rivals while still throwing off cash from disposals, culminating in the 2015 sale of its flagship InterContinental Hong Kong.

So why is it never the right time? Well, it is complicated. Accor’s market capitalisation of €6.2bn is significantly less than IHG’s £7.3bn (€8bn) value, the latter having rallied more than 70 per cent from March lows while the former hardly budged. The French group would therefore need the backing of its main shareholders, China’s state-owned Jin Jiang International and the Qatar Investment Authority, to effectively underwrite the share issue needed to fund any bid. Support from a private equity fund, such as Mr Bazin’s former employer Colony Capital, might also be helpful.

The proposal would not be cheap, nor easy. Institutions that dominate IHG’s shareholder register would probably be expecting upwards of £50 a share as a starting point — a more than 20 per cent premium to its current price — as well as requiring the preservation of its FTSE listing.

A plausible scenario would involve Accor bidding using one-third cash and two-thirds new shares. Using Accor’s stock as a currency to buy more richly valued peer risks appealing more to investment bankers than to shareholders, however. And given the levels of financial engineering required, it is unfortunate, to say the least, that S&P Global downgraded Accor’s debt to junk status this week.

The bigger question: Post Covid-19, is Accor-IHG still the right deal to chase?

Hotel franchise owners pay management companies double-digit percentages of revenues in the belief that a well-known brand will drive higher room rates. Name recognition is most valuable for corporate travel, which accounts for an estimated 60 per cent of IHG’s demand: about two-thirds of its rooms are in the business-friendly midscale and upper-midscale niches. How quickly those rooms will refill after the pandemic is unknown.

For leisure travel, brand safety has appeal when on a budget but uniqueness counts for special occasions. IHG has no budget market exposure and InterContinental, its luxury chain, is by design a more homogeneous experience than Accor flagships such as Raffles in Singapore and The Savoy in London.

IHG is a structure built to withstand recessions, not pandemics. It is in the main revenue collection agency for around 3,000 small businesses, mostly US-based and often corporate-reliant, that are now fighting to survive. The historic reasons why an IHG-Accor merger made sense no longer look quite so compelling. A bid could still come, but the time might never be right.

Source: https://www.ft.com/content/0f2decbb-de27-4aa6-a4b2-54f2631771d1