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InterContinental to pay half billion dollar dividend and half billion share buyback, too

Aug 07, 2012 4:05 am

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The move by IHG to shed real estate assets and focus entirely on management contracts has some upsides, but holding on to landmark properties has its benefits, too — which is why smart people are eager to snap them up.

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InterContinental Hotels, the world’s biggest hotelier, cheered investors by promising to return $1 billion to them funded from the planned sale of a New York hotel and added its flagship London Park Lane hotel is set to be next on the block.

The British-based group, home to the Crowne Plaza, Holiday Inn as well as InterContinental brands, said it will pay a special dividend in the fourth quarter costing $500 million, and also kick off a $500 million share buyback in the same three months.

Chief Executive Richard Solomons said the return of capital reflected the planned sale of its New York Barclay hotel, which analysts expect to fetch around $300 million, as the group reported a 6 percent rise in half-year profits boosted by good trading in its two biggest markets, the United States and China.

The hotelier’s strategy to sell hotel assets in return for management contracts is similar to U.S. peers like Marriott, and has helped return $8.9 billion, including $1.2 of ordinary dividends, since the group’s formation in 2003.

The capital return helped boost its shares up 6.5 percent to 1,727 pence by 05.33 a.m. EDT to be the biggest riser in the FTSE 100 indexin a largely flat London stock market.

The group only owns 10 of its 4,500-plus hotels worldwide with a book value of $1.6 billion, with most of that value being in its flagship hotels in New York, London, Paris and Hong Kong which are all expected to be eventually sold.

The year-long sale process of the New York Barclay should be closed in the next few months, Solomons said, and talks are under way with one exclusive buyer, which analysts say is likely to be the Qatari hotel owner Ghanim Bin Saad Al Saad.

Solomons said that once the group opens its second InterContinental in London in the first quarter of 2013 then it is likely to sell its Park Lane hotel in return for a management contract. Analysts estimate its value at over $330 million.

He added this was consistent with the group’s “asset light” strategy and returning funds to shareholders while still maintaining the group’s BBB investment grade credit rating.

“Interest will come from high net worth and sovereign wealth money from the Middle East, Russia and possibly south-east Asia,” said Robert Seabrook, head of hotel transactions at property consultant Savills.

“It’s one down from the likes of the Dorchester but is at the bottom of arguably the best hotel street in London,” he said.

Continued growth

Solomons said the group reported growth in the half year across all regions, and both hotel occupancy and room rates increased and, despite a tough economic environment, the group was trading well and continued to see growth for the future.

“There might be a little bit of a slowdown in July but that is for one-off factors and for the medium time, the outlook is good,” said Solomons. He added one-off factors included the U.S. July 4 independence day falling in mid-week, and by the end of July growth rates were back running similar to the half year.

Growth in half year global revenue per available room (RevPAR), a key industry measure, grew 6.5 percent with the United States and China ahead 7.2 percent and 9.7 percent, respectively. In July, global growth slowed by 3.8 percent.

The Olympic Games had seen the group’s 51 London hotels full, but the effect was “financially neutral” as games guests replaced regular London visitors, Solomons said.

The hotelier, which operates more than 660,000 rooms in over 4,500 hotels worldwide, posted a 6 percent rise in half-year operating profit to $286 million, in line with an average forecast of $285 million in a company-compiled consensus.

Revenue increased 3 percent to $878 million.

The half-year dividend rose 31 percent to 21 U.S. cents following a decision to rebalance its interim towards one third of the total for the year.

Results from rival hoteliers such as Marriott and Starwoodhave shown signs of a steady industry recovery despite some weakness in euro zone crisis hit southern European nations and some slower growth in China.

Solomons added he was confident the group had complied with all competition laws after Britain’s consumer watchdog, the Office of Fair Trading, accused the hotelier of price fixing with two major online travel agents to restrict discounts that could be offered for hotel rooms.

Additional reporting by Tom Bill; Reporting by David Jones; Editing by Mike Nesbit.

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