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French hospitality company AccorHotels is expanding its foothold in the U.S. by acquiring a 50 percent stake in lifestyle hotel and restaurant company, SBE Entertainment Group, owner of Morgans Hotel Group, for $319 million.
AccorHotels plans to acquire the common stock held by Ron Burkle’s Yucaipa Companies and the real-estate investment firm Cain International for $125 million, and invest an additional $194 million to acquire preferred equity that is also owned by Yucaipa and Cain. If Ron Burkle’s name sounds familiar, that’s because the former grocery store magnate is also an investor in another lifestyle hospitality company, the Sydell Group, whose hotel brands include Freehand, the Line, and NoMad.
SBE founder and CEO Sam Nazarian will continue to run SBE independently from its global headquarters in New York, and will own the remaining 50 percent of the company. SBE’s hotel brands include SLS, Delano, Mondrian, Hyde, and the Redbury, and its dining brands include Katsuya, Umami Burger, and Cleo. It also owns a number of nightclub brands. In 2016, SBE bought Morgans for $82 million, significantly adding to its lifestyle hotel portfolio, which will consist of 25 hotels by the end of 2018.
For AccorHotels, which has a tremendous presence in Europe and Asia, this investment in SBE aligns with its strategy for growth in North America, adding more properties in major gateway cities such as New York, Los Angeles, Las Vegas, and Miami.
In 2016, AccorHotels bought the Fairmont Raffles, and Swissotel brands for $2.7 billion as part of an effort to grow its luxury presence in the Americas, and the addition of SBE’s hotel brands complements those brands by being more lifestyle and millennial-focused.
“North America, for us, is an increased focus,” Gaurav Bhushan, AccorHotels chief development officer and head of mergers and acquisitions told Skift earlier this month. “We’re putting a lot of energy and resources into development here,” he added, noting that the focus would be on luxury and lifestyle brands.
That SBE is a company whose portfolio includes hotels, nightclubs, and restaurants also bolsters AccorHotels’ vision for moving beyond just a hotel company, something AccorHotels CEO Sebastien Bazin spoke about at length at the recent Skift Forum Europe.
“If we were to continue over the next 50 years only offering [hotel rooms], we were going to have a tough wake-up call in 10 years from today because we need to enlarge the number of services we provide to travelers to go beyond providing accommodations and a hotel room,” Bazin said.
For SBE, the investment from AccorHotels gives the company more opportunity to grow its brands internationally, as well as have access to AccorHotels’ 45 million loyalty members. The companies told the Wall Street Journal that they do eventually expect to combine their respective loyalty programs and back-end hotel operations systems.
While there do seem to be many positives for both companies in relation to this transaction, Bernstein senior research analyst Richard Clarke expressed some concern about this particular investment.
“Accor is using the cash from its asset sale to buy more hotel assets, against its plan to be asset light; SBE does manage at least 13 of its hotels,” Clarke wrote in an investor’s note.
According to reports, following the close of this deal, the company will have $582 million (€500 million) from its spin off to spend. And if AccorHotels does go through with buying a small stake in Air France-KLM, that will also leave the company with little to spend on future hotel brand acquisitions.
Earlier this month, when Skift spoke to Bhushan, he said that when it comes to mergers and acquisitions at AccorHotels, “The two principles for us are the strategic brand fit. All regional acquisitions must enhance our leadership position. But in the end, the overarching principle is it’s got to be financially accretive to our shareholders, as a public company. The numbers have to work.”
Clarke also said that because AccorHotels is only investing a 50-percent stake, it may be challenging for AccorHotels to benefit from any synergies from this deal.
“The investment of a debt instrument that simply buys out existing debt does not seem ideal — is Accor a bank?” Clarke said. “And some of the SBE hotels are in existing brand families — the SLS Las Vegas is a Marriott Tribute hotel, for example.”
Regardless of the potential challenges associated with this transaction, AccorHotels has made it clear that it is paying close attention to growing its lifestyle portfolio, and especially so in North America. And it’s also made it quite clear that its acquisitive streak has no intention of stopping anytime soon.