highlight the hole Accor had dug for itself since buying the chain more than two decades ago. Buying out the fixed leases will cause it to register a EUR600m loss when the deal completes on the expected date in October. The net cash impact of
the USD1.9bn being paid by Blackstone is just EUR330m once the cost of taking out leases worth EUR525m is accounted for. The numbers look much better
when the Return on Capital Employed is considered. Here, restating 2011 results based on the exit of Motel 6, ROCE rises from 12.3% to 13.9%. And the disposal barely dents growth prospects, with the pipeline shrinking an immaterial 300 rooms to 114,100 in total. In fact, if anything, growth should surely now be buoyed thanks to the lack of distraction in North America. This year, 30,000 organic rooms are expected to be opened with a further 5,000 coming from acquisitions. Next year the organic growth is expected to accelerate to 35,000 rooms. Despite recent talk of consolidation in the industry, Accor does not look likely to be striking any huge deals given its self imposed ROCE target which must be above 12%. And its ambition to return
to investment grade status for its corporate debt also militates against it making a major move on any rivals. With 50% of its pipeline in
Asia Pacific, there is big shift in Accor’s centre of gravity away from developed markets towards emerging markets. This shift will only be reinforced with the ongoing asset restructuring programme which is to see the sale of 400 hotels to impact net debt by EUR2.2bn by 2015. Post the Motel 6 sales, 54% of
the portfolio is management or franchise with just 10% owned and a further 13% on fixed leases (the rest, 23%, being variable lease). Including the pipeline, 43% of Accor’s rooms are in emerging markets with barely half now in Europe. Accor is going to look a very different company. Hotel Analyst has for several
years argued in a favour of the Motel 6 disposal, pointing out that it is a management distraction in a commoditised market unlikely to yield decent returns for many years.
Despite being the focus of
concerted turnaround efforts, the EUR532m of revenues last year generated just EUR15m of EBIT. In 2010 there was a EUR4m loss. The turnaround effort had seen 55 new franchise hotels opened, bringing the total under franchise to 35% of the portfolio. Some 41 hotels were sold in the year. Blackstone is making clear that
it is not going to absorb Motel 6 into either its Hilton or La Quinta chains. Both these deals, struck at (in the case of Hilton) or shortly before (in 2006 for La Quinta) the peak of the market, have seen debt restructured. Blackstone is making the latest deals using a new real estate fund that is set to top USD12bn. The latest deals are being done at distressed prices, which have generally proved happier hunting grounds for opportunistic funds. Deals struck near cycle peaks, unless flipped quickly, have typically led to burnt fingers. As well as Motel 6, Blackstone
is dabbling in the debts of US chains such as Eagle Hospitality and Extended Stay. With its earlier purchases, Blackstone has had to pay down debt and renegotiate terms. With Hilton in 2010 it bought back around USD2bn of debt for
USD800m and converted other debt into equity to reduce the load from USD20bn to USD16bn. At La Quinta, it has this year
removed USD415m of debt and agreed to a 3.5 percentage point hike on the rates it is paying on USD2.65bn so that it can extend the term by two years to July 2014. The price per room for Motel
6 is around USD25,000 which is below replacement cost, although this alone is no guarantee of making money in what is an oversupplied and depressed market segment. It is not surprising then that Blackstone recognises the need to invest in the chain and further move towards franchising. While the current crop of deals
has been struck a few years after the crash, it is probable the exit could well be at the same time as those struck before 2008. Blackstone, like other opportunistic funds, typically prefers short hold periods of under five years. The crash meant it has had to take pain and hold for longer for those earlier acquisitions. And Blackstone made clear
during its first quarter results presentation this April that it is not anticipating making an early exit with its pre-crash deals, stating that it is not yet a great time to be selling real estate.
Hotel Analyst
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