Accor Hotels Takes a Step Forward

French hotel chain Accor (which manages the Mercure, Ibis, Sofitel, Pullman hotels etc), reported the purchase of USD 2.9 billion of FRHI Holding, luxury hotels chain operating under the Fairmont, Raffles and Swissôtel brands. FRHI owners are the Qatar Investment Agency (sovereign fund of the Arab country), Kingdom Holding of Saudi Prince Alwaleed and Oxford Properties Group Canada. Accor will pay for the assets of $ 840 million in cash and issue additional shares worth $ 46.7 in favor of the sellers.

As a result, the largest shareholders of the combined company will be the QIA (10.5%) and the Kindom Holding with 5.8% share, two representatives of which are included on its board of directors, according to Accor. The merger of the two hotel operators must be still approved by the antitrust authorities and the shareholders’ meeting of Accor own.

Accor today has more than 3,700 hotels around the world, while FRHI 155 hotels, including the Plaza in New York and the Savoy in London, of which 40 are under construction. The acquisition will make Accor the world market leader in the luxury hotels. For FRHI this union means a new stage of growth, given that 75% of its customers are Americans, along with the opportunity to add to the portfolio of Accor’s iconic brands Fairmont, Raffles and Swissôtel is also a unique opportunity for the French multinational.

After the merger, the Qatar Investment Authority and Kingdom Holding Company of Saudi Arabia culminated they will become major shareholders, with 10.5% and 5.8% of the share capital of Accor. Great knowledge with these new shareholders on the luxury hotels sector, can be an additional strength for Accor in a market segment in which until now the French have participated just marginally.

Accor reasons for embarking on this adventure.
Increase Market share in the sector of luxury hotels.
Fairmont, Raffles and Swissôtel represent an irreplaceable presence of luxury Accor Hotels give immediate influence on the higher end of the market. Are the hotels with the longest tradition in the world that are over 100 years of history, mark equaled only by The Ritz-Carlton is the only alternative operator of luxury brands 100 years or more

The three brands acquired are of such a high segment, a priori, there is little overlap with other top-level brands Accor Hotels. Just Sofitel Legend, Pullman Hotels & Resorts, The Sebel and Grand Mercure, would be the highest level segment.

However, equipment and FRHI Accorhotels will meet to avoid that, in any case, there is no overlap between these luxury brands. Approximately 35% of the revenue of Hotel Services, which coordinates Accor franchisees, now come from the sectors of high luxury, creating a better balance in the portfolio, for the French company.

Improve the presence of French multinational in North America.
One of the main drawbacks of Accor has been its limited presence in North America, almost nonexistent since the company eliminated brands Motel 6 and Studio 6 in 2012. «This will give Accorhotels a much greater visibility in North America, specifically the loyalty program collecting 3 million members high-end, mainly in the United States,» said Sébastien Bazin CEO of the French group. The deal would add 115 hotels and 43,000 rooms spread between the Fairmont, Raffles and Swissôtel brands. As noted in construction are currently 40 hotels (13,000 rooms) opened in 2018 outstanding.

Hotels Accor had 3,815 hotels and 500.768 rooms closed in the last quarter. After absorbing the existing portfolio of FRHI, Accor hotels (with almost 550 thousand) enter as the sixth hotel chain in the world by number of rooms. «This would also create many more opportunities for growth, and we intend to accelerate expansion in the luxury segment thanks to a wider range of brands available,» said Bazin at a press conference presenting the project.

As margins continue to erode in an increasingly competitive digital environment, Bazin said that consolidation is one of the best ways to produce synergies and cost savings. Accor Hotels directive expected to save close to € 65 million as a result of the merger.

A tangible example of these economies of scale will be felt with the power to negotiate with the OTAs, since although most hotel companies pay commissions between 15% to 20% contract Accor is much less profitable which today is giving Fairmont & Raffles. By integrating these brands, the amount of the fees payable will be reduced significantly.

Is it  the transaction price appropiate?
There is controversy among analysts over whether the price paid is excessive in fact, the indicator more than 20 times EBITDA, it seems to show. But other experts say that given the projection that will give the combined company a further increase of 40 hotels under construction, the price may be right.

In recent years the hotel market has increased the number of mergers. In the first nine months of 2015, investors have spent a total of about $ 60 billion for the purchase of facilities in the hotel sector representing a 37% increase over the previous year. In November 2015 the second largest transaction of the sector’s history took place: Marriott International announced the purchase of Starwood Hotels & Resorts Worldwide for $ 12.2 billion. If the project goes ahead, it will establish itself as the world’s largest hotel chain with 5,500 hotels under management in more than 100 countries.

Disclosure: The Luxonomist is not responsible for the views expressed in the article. The text was written freely expressing ideas, without receiving any compensation. The author has no business relationship with any of the companies whose shares are listed in this article.