Skift Take

Has Accor’s partnership with Huazhu worn out its usefulness given the Chinese hotel giant has built a strong positioning in the economy and midscale segments in China? Huazhu now wants to focus on luxury and upper upscale, along with international expansion starting in Europe.

Accor is selling half its stake in Huazhu Group, its strategic partner in China, for $451 million. It will retain a 5.8 percent stake in the Nasdaq-listed multi-brand Chinese hotel company, which last month entered into an agreement to buy Frankfurt-based Deutsche Hospitality for about $777 million (700 million euros).

A statement from Accor said the move is about realizing its investment in Huazhu, which has increased in value by 4.5 times since January 2016 when the deal was inked. It has also seen the opening of 200 economy and midscale hotels in China, with an additional 250 properties scheduled to open in the next three years.

Paris-based Accor also emphasized that the partnership with Huazhu will continue, with its chairman and CEO Sebastien Bazin remaining on the board of Huazhu.

Huazhu owns 5 percent of Accor and a seat on the board.

But its acquisition of Deutsche Hospitality, scheduled for completion in January 2020, may throw a spanner in the works into the relationship. An analysis by Bernstein noted the acquisition as “an interesting transaction, as it brings Huazhu into competition with Accor in Europe and ME [the Middle East], and likely as a result Accor has decided to realize some of the profits from its Huazhu stake.”

At press time, Skift is unable to reach Accor for comments on this.

Huazhu’s Next Wave

There are good reasons to believe that Huazhu’s ownership of Deutsche Hospitality could stunt its Accor relationship, which started as an alliance in 2014 and strengthened to involve equity in 2016. At the time, Accor described their partnership as “unprecedented,” creating a “hospitality giant in China whose strength lies in a newly formed joint distribution system and the combination of two ambitious loyalty programs which together boast over 75 million members worldwide.” (Huazhu alone today boasts more than 110 million members.)

Having built a legion of economy and midscale hotels in China under brands such as JI and HanTing, Huazhu, founded in 2005 and until June 15, 2018 known as China Lodging Group, is now moving on to the “next wave,” which is the luxury and upper upscale segment, said its founder, executive chairman and CEO, Qi Ji, during the company’s third-quarter earnings on November 12.

While the Accor-Huazhu partnership has resulted in the opening of 200 hotels in China, the properties are mainly under the economy, upper midscale and upscale Ibis, Mercure and Novotel brands. Huazhu has the master franchise for Mercure, Ibis and Ibis Styles, and co-development rights for Grand Mercure and Novotel, in China, Taiwan and Mongolia.

Ji said Deutsche Hospitality is “the perfect [strategic fit]” for Huazhu’s luxury and upper upscale ambitions.

He said it would take a long time to build a new luxury and upscale brand from scratch. “That’s why we choose to enrich our luxury and upscale brand portfolio through acquisition. This will help to shorten our own learning period, and we will benefit from new perspective of our employees in the newly acquired business,” he said.

“With the acquisition of Deutsche Hospitality, Huazhu now has a rich brand portfolio in each segment from economy up to the luxury and up to upscale segments,” he added.

Deutsche Hospitality will bring three luxury and upper upscale brands to Huazhu, namely, Steigenberger Hotels & Resorts, Jaz in the City and Maxx by Steinberger. It also has the upscale IntercityHotel brand and the economy Zleep Hotels.

Huazhu expects the China development of Steigenberger and IntercityHotel, in particular, to be “fairly quick.” Executive vice chairman Min Zhang said, “And we anticipate the growth will — sorry, the sites will exceed Germany in the midterm, probably.”

International Expansion

Aside from giving Huazhu the luxury and upper upscale brands for expansion in China, Deutsche Hospitality “initialized our footprint in the countries outside China,” said Ji.

The deal helps Huazhu establish a geographic footprint in Europe, the Middle East and Africa, where it virtually has no presence. With it, the group aims to be a global hotel group with a major presence in the home country. Ji targets a doubling of its size within the next three to five years, from 5,151 hotels with 504,414 rooms in operation as of September 30, to more than 10,000 hotels.

Meanwhile, Deutsche Hospitality will benefit from Huazhu’s loyalty program and direct sales capability to strengthen its competitiveness in existing markets, added Zhang. The chain currently has 118 hotels in operation, and 36 under development, in 19 countries in Europe, the Middle East and Africa.

She added that Huazhu’s “leading technology” would further improve Deutsche Hospitality’s operations. “We expect improvement in the back office operation efficiency and the customer interfaces going forward,” Zhang said.

Deutsche Hospitality forecasts a revenue of $544 million (490 million euros) for 2019, with a profit of about $44 million (40 million euros). That’s a valuation of about 17.5 times based on the $777 million acquisition but Zhang said through growing the business, Huazhu expects the multiple to decrease to about 10 times after three years.

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Tags: accor, Huazhu

Photo credit: The Steigenberger Frankfurter Hof hotel: Luxury is Huazhu's next wave. Steigenberger Hotels AG

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