Analysis - February 5, 2007



Content type

All types

Analysis topics

All topics


All authors


February 2007


Print Accommodation, Around the world,

Getting Out of the Hotel Business and into the Business of Hotels

Our expert, M. Michael Nowlis from Tourism Control Intelligence, traces three related trends that have revolutionized the global hotel industry over the last 25 years.

It begins by chronicling the emigration of hotel assets from American ownership to foreign investors in the 1980s and their subsequent repatriation starting in the mid-1990s. Second, it examines how the management focus of large international hotel groups has shifted from a real estate orientation to an emphasis on brand management. Finally, the article explains how this business reorientation resulted from the increasingly shorter planning horizons of global investors.

The Great American Sell-off

Recent reports in the press speculate that InterContinental Hotels Group (IHG) will be the target of a US$ 11.2 billion takeover bid in the coming months. The stratospheric price tag stuns even seasoned industry analysts who have followed hotel mergers & acquisitions for decades. IHG has an impressive portfolio of internationally recognized brands – InterContinental, Holiday Inn, Crowne Plaza and Indigo among others. The company is well diversified in terms of market segments and global coverage. Nonetheless, IHG’s 60% increase in share price from August 2006 to January 2007 raises numerous issues concerning market speculation, quality of management and company financial fundamentals. Industry analysts predict an American REIT (Real Estate Investment Trust) or private equity group will make an unsolicited offer of 1500p for outstanding IHG shares during the first half of this year. Such an offer would represent an 80% premium over the August share price (840p) on the London Stock Exchange.

An IHG takeover would be significant for reasons in addition to the lofty price. The two most frequently cited contenders are US investment firms – Barry Sternlicht’s Starwood Capital and the Blackstone Group, a private equity firm with extensive hotel assets. The acquisition of IHG by American investors would bring the international hotel industry full circle, reestablishing North American dominance in the global lodging sector.

The American withdrawal from international hotel markets began in 1981 when Pan American Airways sold its InterContinental division to Grand Metropolitan, a British food and hotel group. The sale sparked a prolonged sell-off of North American hotel companies to foreign investors. Most notably, Holiday Inn, the world’s largest hotel company at the time, was sold to England’s Bass Brewing Company in 1987.

The InterContinental sale sparked another trend that would radically transform the travel industry over the coming years. Airlines began to shed their hotel assets to focus on core transportation activities. Within a period of a few months in 1987, Chicago-based United Airlines sold its Hilton International, Westin and Camino Real hotel subsidiaries to British and Japanese investors. In the following years, all of the world’s major airlines liquidated their lodging divisions. Travel industry executives came to reject the conventional wisdom that airlines and hotels, operated by the same company, were strategically complimentary business units.

Asian investors were particularly eager to acquire American hotel groups. Hong Kong-based New World Development purchased the Ramada International, Renaissance and Stouffer’s hotel companies. Regal, another Hong Kong group, acquired Richfield, one of North America’s largest management companies with a vast portfolio of hotels flying Sheraton, Hilton, Choice and Holiday Inn flags, among others. Dubai’s Kingdom Hotel Investments went on a Canadian shopping spree, picking up Delta and CP Hotels, as well as taking significant positions in Four Seasons and Fairmont.

While Asians were focusing on the luxury segment, French investors turned their attention to the US budget sector. With its purchases of Motel Six and Red Roof Inns, Groupe Accor acquired more than 1000 lodging establishments in the US and Canada.

As one hotel company after another was sold to foreigners, North American investors were accused of an obsessive focus on short-term profits. Analysts claimed that Asian and European investors with longer planning horizons would reap handsome returns further down the road. American impatience, it was argued, was allowing foreign investors to purchase the crown jewels of the global hotel industry at prices that were likely to appreciate at supernormal rates of growth.

Coming Home

Just as the American sell-off appeared to have reached the tipping point, a curious thing happened. In 1994, a group led by little-known Starwood Capital and Goldman Sachs purchased Westin from the Japanese Aoki group, returning the company to US ownership. While Aoki had liquidated some non-strategic assets, the $537 million selling price was approximately a third of what the Japanese had paid United Airlines for the company in 1988. Analysts claimed the Westin takeover was an opportunistic acquisition that did not portend a trend in hotel asset repatriation. It did not take long, however, to prove them wrong.

In 1997, Marriott purchased Renaissance, Ramada International and New World Hotels from their Hong Kong-based proprietors. More recently, Hilton Corporation bought Hilton International, its British based namesake, for $5.7 billion. The Hilton acquisition reunited the company 42 years after the international division had been spun off to Trans World Airlines and nearly 20 years after it moved its headquarters to the UK.

American investors are not known for tiptoeing into business markets any more discreetly than the US Army tiptoed into Baghdad. Such was case with their return to international hotel investment. Not satisfied with merely reclaiming “American” hotel companies, US investors went on a shopping binge, acquiring a vast array of international lodging firms. Sheraton purchased CIGA, the Rome-based company that maintained a virtual monopoly on Italy’s upscale hotel market. The Carlson Companies, parent of Radisson Hotels, purchased Regent International, the Hong Kong-based hotel group that had established Asia’s reputation for luxury hotel keeping. Starwood picked up Le Meridien Hotels, a chain founded by Air France and sold to British interests in 1994. Starwood also acquired Hotels du Louvre, Europe’s 2nd largest hotel company which included the upscale Concorde brand.

Shorter Investment Planning Horizons

Have American capital markets given up short-term investing to concentrate on long-term asset appreciation? Nothing could be further from reality. The return of US dominance to hotel equity markets manifests the economic globalization of international investment activity in general. Investors of all nationalities are calculating risk and return for increasingly shorter planning horizons. In uncertain times, why would Hong Kong investors wait several years for investment returns when the Shanghai Composite Index was up 122% in 2006? Bourses in Peru, Vietnam and Venezuela appreciated at168%, 144% and 156% respectively last year. In the interconnected and interdependent world of the 21st century, investors from Albania to Zambia are using the same investment criteria to identify the most lucrative opportunities in global markets. Calculations no longer focus on the net present value of expected cash flow for decades to come. The key is to assess appreciation of asset values (real estate or management contracts) next year or even next month.

The Hotel Washington in the US capital provides an illustrative case study of this trend. Gal-Tex, which owned the hotel for 65 years, sold it to Westbrook Partners for $120 million in the spring of 2006. Barely six months later, Westbrook turned the property over to Istithmar Hotels for $150 million, reaping more than $1 million profit for each week it had owned the hotel.

The Savoy Group in London provides an even more astonishing example of such rapid-fire turnover of trophy assets. The Savoy Hotel and its three sister properties with a total of 772 rooms were purchased by the Irish investment group Quinlan Private in May 2004 for $1.36 billion. The 226-room Savoy Hotel was valued at approximately $380 million at the time of sale. Within a few months, Quinlan sold the Savoy to Kingdom Hotel Investments for a reported price of $475 million. Measured by the $1.8 million per room price tag, the sale represents one of the highest prices ever paid for a hotel. While Quinlan had been widely criticized for overpaying for the Savoy Group, the acquisition provided a $95 million profit on the sale of just one hotel that it owned for less than a year.

From Real Estate to Brand Management

The plethora of hotel transactions also manifests the value of non-tangible assets in the hotel industry. As lodging companies divest of real estate, the value of management contracts, franchise agreements and internationally recognized brands has become increasingly easier to assess. When Hutchinson Whampoa, the proprietor of the Hong Kong Hilton, demolished the hotel in 1995 to build a commercial office complex, it was obliged to pay Hilton $125 million to buyout the remaining 20 years of its management contract. In a bizarre paradox, the sum was not being paid to manage the hotel but rather to not manage the hotel. In testament to the potential value of a management contract, Hilton made clear that it did not want a payment of $125 million. The company preferred a continuation of the management contract. In the end, Hilton was legally obligated to vacate the premises and accept the settlement. The case illustrates, however, the radical changes that have turned the hotel sector upside down.

The growth of franchising has further altered the basic structure of the industry. While franchising of lodging establishments was pioneered by Holiday Inn’s standardized motels in the 1960s, only recently have upscale international groups been willing to permit owners to manage their hotels under a prestigious corporate banner. Almost all of the major international hotel companies now engage in franchising as a capital-free vehicle for rapidly growing their brands. The Carlson Companies have taken the concept to the extreme, having sold all of their hotels and given up most management contracts. The group now focuses almost exclusively on franchising its Regent, Radisson, Park Plaza and other hotel brands.

As hotel franchisers and management companies put increasing emphasis on international product recognition, brand management is becoming the critical skill for competitive advantage. This revolution has been manifested in recent years by the selection of brand management professionals (rather than hoteliers) to head the world’s largest lodging companies. Ian Carter, President of Black & Decker EMEA was appointed Chief Executive of Hilton International in 2005. When Hilton Corporation acquired the company the following year, Carter was the only top executive retained by the parent company, where he now serves as Chief Executive Officer for international operations.

Andrew Cosslett, President of Cadbury Schweppes EMEA, was named head of InterContinental Hotels about the same time Carter joined Hilton. The following year, the logic for hiring an executive from the confectionary industry to head a hotel company was explained in a CNBC broadcast. Interviewer Ross Westgate asked Cosslett, “Because you manage hotels now rather than own them – you’ve sold a lot of the assets off, so is it now brand management – is that essentially what you do?” The new chief executive replied, “That’s really our focus.”

When Starwood Hotels founder Barry Sternlicht decided to step down as Chief Executive Officer, none of the short-listed candidates to replace him were from the hotel industry. Steven Heyer, President of Coca-Cola was eventually recruited to assume the CEO position at Starwood, primarily for his branding prowess. Shortly thereafter, Starwood recruited Javier Benito, President of Coke’s US retail division to serve as the company’s Executive Vice President.

While peddling Coca-Cola in supermarkets may appear greatly removed from selling St. Regis suites on the web, the success of both depends on the effectiveness of brand management. The fact that executives with no hotel experience are increasingly recruited to manage the world’s largest lodging companies has significant implications for hoteliers, investors and educators. If branding skills are the most important qualifications for heading a global hotel company, what is the future of the industry? Where is the value in a hotel company?

Traditional hotel executives may scoff at such trends but stockholders are euphoric. The recent 60% rise in IHG share price has persuaded investors that hotel companies need a new breed of leader to maximize return on investment. If the IHG takeover bid is successful, providing stockholders an 80% share appreciation in less than a year, it will be difficult to argue with them.


The increasing divergence of hotel ownership (real estate), operations (management) and marketing (brand distribution) will intensify in the coming years. “Hotel management” will refer only to those activities that directly impact above-GOP (Gross Operation Profits) controllable expenses. Private equity funds, REITs and institutional investors are dominating the hotel real estate markets. Franchisers are achieving competitive advantage in sales and distribution. Increasingly, companies once considered at the core of the lodging industry are getting out of the hotel business and into the business of hotels.

Review our Netiquette