Another day, another rumor that Accor and IHG will combine forces. But even a successful merger is unlikely to send the hotel industry into a wave of consolidation due to so many other distressed deals expected during the pandemic recovery.
Long-rumored hotel merger partners Accor and IHG are once again garnering headlines about a potential tie-up that would result in the world’s largest hotel company.
The timing for such a deal, which would be the biggest in hotels since Marriott acquired Starwood in 2016, seems doubtful right now, say analysts. But it’s interesting to ponder the marriage of these two giants of hospitality, and how it may change, or more than likely, not change the overall hotel industry.
Even as a pandemic shakes the industry to its core, the fundamentals may not be right for such a mega-merger. While limited profitability in the airline industry diminished the number of major airlines around the world over the last 20 years, that same merger gung-ho spirit is unlikely to extend to hotels anytime soon.
“The thing with the airline industry is profitability got quite low, and it needed to merge and consolidate,” said Richard Clarke, senior analyst at Bernstein. “I don’t think we’re there in the hotel industry. It’s still possible for a good, small, single hotel to be profitable.”
Clarke favors organic growth over a costly merger in the current environment, as it costs a parent hotel company fairly little money to get existing hotels to take on a brand flag or, in better economic times, build out a new-construction pipeline.
Hilton is the fastest-growing of the four major hotel companies — which also includes Marriott, IHG, and Accor — today and hasn’t executed a merger or acquisition in more than 20 years, according to a Bernstein report. The company has also only funded less than 0.5 percent of its $50 billion development pipeline.
Focusing on a costly merger could distract a combined Accor and IHG from organic growth opportunities like Accor’s own UK deal with Travelodge owners to switch flag affiliation to the Paris-based company’s Ibis brand. Other company CEOs continue to see organic growth opportunities by signing independent hotels into branded franchise agreements.
“You do this, and they’ll be too distracted trying to merge these companies, and they’ll lose out to Hilton, Marriott, or whoever on the opportunities that come at the other side,” Clarke said. “Would they be turning away good, organic, basically free deals while this is going on?”
That said, he sees the many years of merger rumors as proof industry chatter may be overblown when it comes to Accor and IHG tying the knot.
“When Marriott and Starwood happened, everyone thought that was going to kick off a round of consolidation,” Clarke added. “We all thought IHG was going to merge with Wyndham, that Hilton was going to merge with Hyatt, and Accor might be involved somewhere — and none of it happened.”
Global Footprint, Questionable Value
While an Accor and IHG pairing remains highly speculative at the moment, an actual merger would catapult the joined brands over Marriott to become the world’s largest hotel company with more than 1.6 million hotel rooms. IHG has a roughly $10.7 billion market cap today compared to Accor’s nearly $7 billion.
Marriott, currently the hotel industry’s largest company, has 1.4 million rooms, as of the end of the second quarter. The company is also currently valued at around $33 billion.
But the merger would have a different end result than Starwood and Marriott’s $13 billion 2016 marriage. While Marriott ended up with a highly dense network of hotels, Accor and IHG have complementary geographies that would result in a global network with less overlap.
Accor is focused on Europe while IHG is big in North America and growing quickly in China.
“What’s interesting is Accor and IHG would have a wider spread rather than a dense network. You could argue that’s better, but you could also argue that’s not better,” said Nicolas Graf, associate dean at New York University’s Jonathan M. Tisch Center of Hospitality. “Density of market makes sense. If you own the New York or Paris market, then you have a significant competitive advantage over [online travel agencies] and others.”
But it is also very difficult to gain competitive market share in the fragmented hotel industry.
There is still a vast array of independent hotels and smaller brands around the world where the “big four” brands only account for 13 percent of the global hotel room supply, according to the Bernstein report.
That limited market share is likely to give other hotel companies pause in pursuing any costly merger that may not deliver the pricing power seen through consolidation in other industries.
“Across the world in any city, there’s a lot of disruption in that space. The idea that a couple companies are going to own so many of the rooms, well, I don’t think that’s much of an issue,” said Steve Carvell, a professor at Cornell University’s School of Hotel Administration. “In New York City, Marriott has no pricing authority — there are independents, smaller brands, and the Airbnb-types — which makes it a wonder how much you’ll pay for a brand in a merger.”
Analysts have paired off IHG and Accor as ideal merger candidates as far back as 2014, but talks have typically involved IHG as the buyer and Accor as the acquisition target. Now it is Accor that would potentially be in the driver’s seat of any such deal, according to reports in the French newspaper Le Figaro.
Given the ongoing pandemic causing so much uncertainty in the travel sector, analysts told Skift a merger may not be the best move at this time.
“Nobody is even transacting individual hotels right now because how do you set the price?” Carvell said. “The price discovery process right now is very difficult. The market uncertainties around the current prices themselves, because these are public companies, are sketchy. Finding a price and reasonable share replacement is difficult.”
The bank lending environment is extremely tight for the hotel industry, as the coronavirus pandemic depleted travel demand and put a giant question mark over the valuation of many properties. But that uncertainty also extends to hotel companies themselves — even if most tout how they have limited exposure to real estate and simply franchise out their array of brand flags to hotel owners.
“Literally what you’re doing [in a hotel company merger] is buying management contracts and franchise contracts,” Carvell said. “That entire business model right now is under a lot of stress. A lot of the owners across the world are sitting in hotels that are empty, 20 percent, 30 percent, or, if they’re lucky, at 50 percent occupancy — yet they still have to pay the money off the top [toward their franchise agreement].”
Downturns can make sense as the right time to move ahead with a merger or acquisition, as tough times lead to better deals. But a global pandemic that cratered travel demand makes it extremely difficult to put any price, let alone a distressed one, on a travel-related company.
Further uncertainty surrounds when the hotel industry will even return to 2019 performance levels. Marriott CEO Arne Sorenson predicted during a Cvent webinar this week his company’s China portfolio could return to pre-pandemic revenue levels as early as next year.
But STR recently downgraded its U.S. hotel forecast, predicting it may take as long as 2023 to fully restore hotel demand and until 2024 for room revenue to rebound.
“There’s a lot of uncertainty, and that’s what’s going to make it very hard to happen,” Graf said. “Will people be willing to underwrite this kind of deal given the uncertainty, both in general travel but tensions between China and the U.S., tensions between Europe and Russia, and tensions within Europe?”
Beyond geopolitical disputes, there is still the fact the global pandemic taking the biggest toll on travel has yet to be contained in places like the U.S.
“I think [positive] factors are outweighed by the fact this would be complex and the timing is bad,” Clarke said. “What management should be focusing on at the moment is navigating coronavirus and picking up the organic opportunities that might arise on the other side.”
Both Accor and IHG declined to comment for this story, but IHG CEO Keith Barr recognized the perennial speculation during a Skift Forum Europe panel in 2019.
“I’ve been with the company for quite a long time, and so every few years we’re going to be bought — and then it doesn’t happen. And then we’re going to be bought, and then we’re going to buy Accor,” Barr said with a laugh. “I can never comment on specific M&A, but there’s always going to be speculation because scale really matters in this industry.”
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Photo credit: The InterContinental Kuala Lumpur, one of IHG's premier hotels. InterContinental Hotels Group