When news leaked over the weekend that China’s Anbang Insurance Group (yes, the same Anbang that attempted to buy Starwood for close to $14 billion earlier this year) was considering a $9.12 billion purchase of London-based InterContinental Hotels Group, it immediately reignited discussion about further consolidation in the hospitality industry.
IHG declined to comment on the rumors and Anbang Insurance Group issued a statement denying the reports: “Anbang has no plans to make a bid and is not considering an offer for InterContinental.”
Regardless of whether Anbang is eyeing IHG, however, there’s a case to be made for why IHG would be a solid investment. The company has been at the center of merger and acquisition conversations for some time now.
Here’s a look at a few of the reasons why IHG would make a favorable acquisition for the likes of an investor like Anbang Insurance Group or another hotel company, as well as why IHG might also be in a good position to acquire another one of its peers:
1. IHG is one of the biggest hotel operators in the world. If you look at the numbers, IHG is the third largest hotel operator in the world, with 744,368 rooms worldwide, or 739,137 rooms, excluding timeshares, as of December 31, 2015.
Its two biggest competitors are Hilton Worldwide, with 758,502 rooms worldwide (748,887 when you omit its timeshare business), and Marriott International, which has 759,330 rooms (although that number drops to 742,265 when you leave out its residences and timeshares).
Should the Marriott-Starwood merger be completed, barring any interference from antitrust regulators in China, the combined company would have more than 1.1 million rooms, making it the largest hotel company in the world.
2. InterContinental owns the world’s largest hotel brand, Holiday Inn, with 3,651 properties, or 464,506 rooms around the world. In contrast, Starwood, including all of its 11 brands, operates only 370,000 rooms in 1,297 properties as of the end of 2015.
IHG’s other brands, including Crowne Plaza and InterContinental, likewise have a tremendous global presence. IHG’s 2014 purchase of Kimpton also boosted its ability to grow in the lifestyle/boutique space. And one of its newest brands, Hualuxe, has a focus on the Chinese travel market, which is poised to be one of the biggest, if not the biggest, in the world.
3. IHG model is the epitome of an asset-light hospitality strategy. That’s the model that most big companies, including Marriott, Hilton, and Starwood, have pursued, as well as IHG. In fact, 97 percent of its revenues come from fees collected from its hotel owners and franchisees. Researchers from Morgan Stanley, in a recent investors’ note, said that because of this, they think it’s more likely IHG would want to merge with another equally asset-light hotel company over one that owns or leases its hotels, as Hyatt does.
4. InterContinental has a healthy pipeline of new hotels to be built in the next few years. A recent remark by IGH CEO Richard Solomons that IHG already has “enough scale” rings true, and its pipeline of new hotels is also increasing at a solid pace. He noted IHG signed 35,000 rooms into its pipeline this year and that 45 percent of that pipeline is already under construction. Industry-wide, IHG has about 13 percent of the active pipeline for new hotels.
5. IHG has the biggest hotel loyalty program. As Skift pointed out in May, IHG has 92 million members worldwide, whereas Marriott has 54 million and Hilton has about 51 million. That’s a lot of loyalty program members. Given the fact that all the big brands, IHG included, are launching major direct booking pushes aimed at building up their loyalty numbers, this number is significant.
However, it should also be noted that just because a hotel company has a lot of members, that doesn’t necessarily mean they’re all equally engaged or particularly loyal to any one brand. The challenge for IHG and its peers isn’t just a numbers game; it’s also about making sure those millions of members stay loyal time and again.
In November, just days before it was announced that two of IHG’s major competitors — Marriott and Starwood — were merging, there was speculation that IHG was exploring a sale or merger. Some of the reports at the time said IHG was considering acquiring Starwood and the Fairmont, Raffles, and Swissôtel (FRHI) brands.
In December 2014, IHG was one of the first major hotel companies to engage in merger and acquisition transactions, announcing its $430 million purchase of Kimpton Hotels & Restaurants. Also in 2014, there were reports that Wyndham or Starwood had unsuccessfully tried to buy IHG. That same year, San Francisco-based hedge fund company Marcato, then a 4 percent shareholder in IHG, also launched a campaign to try to encourage IHG shareholders to consider selling the chain.
Paris-based AccorHotels eventually purchased FRHI for $2.7 billion, closing the acquisition on July 14. Marriott’s $12.2 billion acquisition of Starwood, which famously included multiple last-minute unsolicited bids from Anbang Insurance Group, was approved by both companies’ respective shareholders on April 8, but it still needs clearance from antitrust regulators in China to close.
During IHG’s second quarter earnings call with investors on August 2, CEO Solomons characterized the company as already “having enough scale” and he didn’t discuss IHG acquiring any other companies, or being the subject of an acquisition.
In an earnings call on May 6 discussing the first quarter, CFO Paul Edgecliffe-Johnson said, “I guess we kicked off the M&A cycle with the acquisition of Kimpton, and we bought it because it’s a really strong brand with a lot of brand equity there, and very clear in terms of the management contracts. So that was something that, then, we could take internationally and that is what we like: it is something that’s got scale in one market, but then a lot of opportunity and a lot of guest requirements and owner preferences for it, so we could build [it] around the world.”
Edgecliffe-Johnson added, “Frankly, if something else comes up, but like that — like a Kimpton — we would look at it very, very hard and equally. We’re quite disciplined in how we look at acquisitions and we do want to make an appropriate return on capital employed.”
Scale remains incredibly important in today’s hospitality landscape. You could argue it’s the main reason why Marriott doled out more than $12 billion to buy Starwood and why AccorHotels spent nearly $3 billion to buy FRHI. But it’s not just scale for scale’s sakes that’s driving this increased amount of merger and acquisition activity; it has to be strategic.
For Marriott, Starwood is largely a loyalty play. Adding Starwood’s estimated 21 million loyalty members to its already 54 million members is incredibly strategic for Marriott’s global growth, and its pursuit of more direct relationships with consumers. Acquiring FRHI gives AccorHotels increased presence in the Americas, as well as a boosted suite of luxury brands. IHG’s acquisition of Kimpton gave it an established boutique and lifestyle brand with which to expand on a global scale.
So, who’s likely to want to buy IHG at this point? Well, Anbang, possibly, for one. With very deep pockets and a desire for more investments in the hospitality space, Anbang is a likely candidate. IHG’s current market cap is about $9.86 billion. And if Anbang were willing to spend more than $13 billion to buy Starwood Hotels, which currently has a market cap of $13.08 billion, who’s to say it wouldn’t be willing to spend well more than $10 billion to acquire IHG, which is arguably much larger than Starwood in terms of its room numbers and global reach.
Or should IHG consider merging with another hotel company, or buying another? And if so, whom? When Starwood put itself up for sale last year, more than 30 parties expressed some interest, with seven eventually signing confidentiality agreements. And although economic conditions and challenges have changed since then, it’s safe to assume some of those same parties might still be interested in making a major investment in a company like IHG.
Morgan Stanley researchers, in that same investors’ note, said: “From a funding perspective, no listed hotelier is large enough to be able to pay for IHG with cash, and issuing equity to shareholders in another jurisdiction can be complicated by ‘flowback’ issues. Most other large hoteliers are listed in the U.S.”
Would IHG combine with Hilton to form the new world’s largest hotel company? Or would IHG consider combining with a relatively smaller player like Hyatt, whose CEO has expressed interest in possible transactions going forward? At this point, we’re all still wondering, but one thing we can be sure of is that the possibilities are certainly out there.