Report OverviewParis-based AccorHotels is arguably pursuing one of the most aggressive, innovative, and unique strategies in the entire hospitality industry. The company went from being a relatively small European hotel company of 482,000 rooms and 14 brands in 2014 to 684,000 rooms across 32 different hotel or short-term rental brands today through both organic and inorganic growth. In this report, we focus on two aspects of AccorHotels’ growth strategy: its approach to acquisitions and investments, and the sale of a majority stake in AccorInvest to become an asset-light company. Clearly, AccorHotels isn’t just thinking about hotel rooms and putting “heads in beds,” but how to best position itself as an all-in-one travel experience platform for consumers pre-, during, and post-stay.
What You'll Learn From This Report
- An overview of AccorHotels by the numbers: sales, earnings, supply, and pipeline
- Geography and chain scales: Accor’s past, present, and future
- A breakdown of the AccorInvest sale and what it means for Accor to shift asset-light
- An assessment of the success of AccorHotels’ M&A (mergers and acquisitions) strategy
- A description of other areas of strength for the company
- Skift Research forecasts for AccorHotels’ 2018 RevPAR (revenue per available room), revenue, and earnings
- Company risks
Paris-based AccorHotels is arguably pursuing one of the most aggressive, innovative, and unique strategies in the entire hospitality industry. The company went from being a relatively small European hotel company of 482,000 rooms and 14 brands in 2014 to 684,000 rooms across 32 different hotel or short-term rental brands today.
However, the company isn’t just thinking about hotel rooms and putting “heads in beds.” AccorHotels owns or has investments in businesses in related industries such as co-working spaces, concierge services, dining, and events services as well as digital booking platforms. And it appears the company has no plans to halt its venture capital-like M&A (mergers and acquisitions) strategy. In so doing, the company seeks to become an all-in-one experience platform, catering to all consumer needs pre-, during, and post-stay. Travel and experiences are a lifestyle, and Accor is showing consumers and investors how it can take hospitality to the next level.
At the same time, Accor has been pursuing a change in organizational structure similar to that of its peers. In February 2018, Accor initiated the sale of a majority stake in AccorInvest, the company’s owned and leased hotel business, thus de-consolidating the low margin hotel business. The transaction not only improves Accor’s margin trajectory and creates a more stable, nimble company, but also frees up capital for debt paydown, share repurchases, and of course, more acquisitions.
Accor’s stock price is up 20% since the October 2014 announcement of its digital transformation strategy, and up 5% since the announcement of the intention to sell a stake in AccorInvest in July 2016, but we know the company has no plans of slowing down anytime soon. Our research suggests that what might appear as a somewhat reckless, unpredictable business strategy is actually a thoughtful, intentional, and strategic approach to best position the company for the future.
As of September 2018, AccorHotels is made up of 32 different hotel or short-term rental brands covering over 684,000 rooms in 100 countries. The company also owns or has investments in businesses in related industries such as co-working spaces, concierge, dining, and events services as well as digital booking platforms.
According to Skift Research estimates, today AccorHotels has a 4% global market share based on number of rooms, and room revenue coming from the company’s properties make up 3% of the total estimated global lodging revenue. Nevertheless, as the company expands into other tangentially related or adjacent industries, AccorHotels is demonstrating a different definition of what it means to be a hotel company in today’s environment.
Accor Organizational Changes
In February 2018, AccorHotels initiated the process of selling a majority stake in AccorInvest, the company’s owned and leased hotel business. We discuss the transaction and its significance later in this report under “Diving In: The Power of an Asset-Light Company.”
Following this transaction, the company also made some reporting and organizational changes. Given the importance of these changes, we clarify exactly what each segment entails below as we discuss them throughout the report.
Previously, the company’s primary reporting segments were HotelServices (manager and franchisor operations) and HotelInvest (hotel owner and leased business).
AccorHotels’ New Reporting Segments
- HotelServices: the company’s hotel franchisor and operator business and activities related to hotel operations
- New Businesses: the company’s new businesses acquired primarily through acquisitions including digital services (Fastbooking, Availpro), private rentals (Onefinestay, Travel Keys, Squarebreak), digital sales (VeryChic), hotel distribution solutions (Gekko), restaurant reservations, and concierge services. This segment only includes acquisitions of companies that are fully consolidated within Accor’s financial results, whereas investments in companies that are recorded using the equity method accounting standard are reported on a separate line item on the income statement called “Share of net profit of associates and joint-ventures.”
- Hotel Assets & Other: the company’s owned and leased assets that have not been transferred to AccorInvest. The division also includes a few activities in Asia Pacific that were previously in HotelServices: Accor Plus (Asia Pacific travel, dining, lifestyle program), timeshare, Strata (hotel distribution and management of common areas of hotels), and AccorLocal (promotes hotel amenities to local residents).
Accor by the Numbers
In 2017, AccorHotels reported over €1.9 billion ($2.3 billion) in annual revenue, over €620 million ($750 million) in earnings before interest, taxes, depreciation, and amortization (EBITDA), and revenue per available room (RevPAR) of €61 ($73 based on the EUR/USD exchange rate on December 31, 2017). However, taking into account some changes in International Financial Reporting Standards (IFRS) and pro forma (Latin for “for the sake of form,” meaning financials that have been restated to be more in line or apples-to-apples with future financials or projections adjusted for changes) for the de-consolidation of AccorInvest (the sale of a majority stake in AccorInvest is discussed in more detail later in this report), AccorHotels had around €3 billion ($3.7 billion) in revenue in 2017. Accor continues to demonstrate tremendous organic and inorganic growth, with year-to-date revenue up 10% on a pro-forma basis.
We note in the charts below that financials are presented in euros, given that is the currency the company reports in and 2016 and 2017 figures have been adjusted for accounting changes and the AccorInvest de-consolidation in 2017.
Today, AccorHotels has 685,000 hotel rooms and a growing pipeline of 184,000 rooms. Rooms in the luxury and upscale chain scales make up 35% of the pipeline (as of Q3 2018), and 70% of the pipeline (as of April 2018) is located in the Middle East and Africa.
Today, Accor is the largest hotelier in Europe by room count, with almost half of its portfolio residing in Europe. However, the majority of its pipeline is in high growth markets like the Asia Pacific region (49%) and the Middle East and Africa (22%).
Accor’s current portfolio is primarily in the midscale and economy segments. The largest brands in these categories include Ibis (as well as Ibis Styles and Ibis Budget), Mercure, and Novotel.
The company’s luxury segment expanded considerably with the acquisition of Fairmont in July 2016. Going forward, the company’s pipeline is more heavily skewed toward the luxury and upscale segments. Given that these chain scales typically have higher RevPAR relative to lower-end chain scales, we should see a shift in the company’s RevPAR in the positive direction.
Accor Performance Versus Peers
Accor is very much a growing player in the hotel category compared to its major peers. For the charts that follow, we included Marriott, Hilton, Intercontinental Hotels (IHG), Wyndham Hotels, Choice Hotels, and Hyatt as Accor’s primary peers.
As of Q3 2018 results, Accor is ranked fifth out of the seven peer companies in terms of number of rooms, but fourth in terms of pipeline room count. The company remains the largest player in Europe with 331,217 rooms, versus IHG, which has 205,829 rooms in its EMEAA (Europe, Middle East, Asia, and Africa) segment.
In terms of year-to-date RevPAR numbers, Accor skews toward the lower half of its peer group, given its current exposure to the midscale and economy chain scales, which generally offer rooms at a lower price point relative to luxury and upscale. However, the company has the highest RevPAR growth year-to-date.
We also included year-to-date EBITDA and EBITDA margin numbers, as several of the companies do not report quarterly EBITDA and/or revenue numbers. Although Accor has room for growth in terms of the size of its EBITDA as well as margin profile, we expect that with the selling of a majority stake in AccorInvest, the company is on the right track. Given that management and franchise contracts are much higher-margin businesses relative to ownership, Accor should see better flow through as the company grows. We discuss this in more detail in the section, “Diving In: The Power of an Asset-Light Company.”
Accor: Valuation and Investor Focus
AccorHotels’ stock trades on a European stock exchange called Euronext in Paris. The company’s stock price is down 7% year-to-date, but is up 21% versus five years ago.
The stock’s recent declines relate to a few key factors. For one, the company’s initial sale of a 55% stake in the property business in February 2018, AccorInvest, came in at a gross asset value of 6.25 billion euros, a discount to the 6.6 billion expected by the company in December 2016. The company has made subsequent stake sales, and we discuss the transaction in more detail in the section, “Diving In: The Power of an Asset-Light Company.”
The second factor is the poor performance of new businesses in the first half of 2018 as well as a lower-than-expected outlook in the category. The company also recorded a provision for an impairment in Onefinestay and John Paul of €246 million ($288 million).
In addition, Accor’s stock may be impacted by larger market factors. The stock’s performance from the beginning of the year has essentially been in line with the CAC 40 index, a benchmark French stock market index of which Accor is a constituent. However, The CAC 40 itself has been underperforming U.S. equity markets due to ongoing European economic uncertainty, slower-than-expected economic growth, and challenges in various countries such as Italy. As Accor is the largest hotelier in Europe, it makes sense that the stock would be influenced by these macro-level market factors.
Regardless, we believe that Accor faces a positive growth outlook trajectory and, with a now asset-light operational model, merits a higher valuation. We do note that Q3 2018 results came in above expectations. However, it may take some time to see the benefits of the company’s growth profile.
Diving In: The Power of an Asset-Light Company
In this section, we break down Accor’s recent transition to asset-light through the sale of a majority stake in its owned and leased hotel assets. We provide a timeline of the process before detailing why moving asset-light makes sense for public hotel brand companies. We then detail what the transaction will mean for Accor specifically.
Breaking Down the Transaction
We offer a timeline of AccorHotels’ transition to asset-light:
- July 2016: AccorHotels initiates a project to turn HotelInvest (its hotel owned and leased operations) into a subsidiary (i.e. sell a portion of it) in order to free up financial resources to accelerate growth in HotelServices and for acquisitions.
- January 2017: The company indicates it has entered discussions with potential investors to sell a majority stake of HotelInvest with expectations for the operation to close in early-summer 2017.
- May 2017: The company’s board of directors approves the separation of its HotelInvest (“The Booster perimeter”) assets and places them under the AccorInvest group, which will include 960 hotels and have 40,000 employees across 26 countries.
- December 2017: The company indicates it has received several detailed confirmations of interest and hopes to reach a final agreement soon.
- February 2018: AccorHotels initiates the sale of a majority stake (55%) in AccorInvest to Sovereign Wealth Funds, namely the Public Investment Fund of Saudi Arabia (PIF) and GIC (of Singapore), Institutional Investors, namely Credit Agricole Assurances, Colony NorthStar, and Amundi, and other investors. For AccorHotels, the initial sale resulted in a cash contribution of €4.4 billion. The hotels will be operated by AccorHotels under long-term management agreements. The portfolio consists of 891 hotels in 27 countries, primarily in Europe; 324 are owned and the rest are operated under fixed or variable-rent leases. Following the closing of the transaction, the company plans to implement a two-year buyback program of up to €1.35 billion, or 10% of its share of capital based on its current market capitalization.
- April 2018: The company expects the transaction to finalize before the end of Q2 2018.
- May 2018: The February deal closes. Final terms are for the sale of 57.8% (slightly more than the February announcement) of the capital of AccorInvest to sovereign wealth funds Public Investment Fund (PIF) and GIC, institutional investors Colony NorthStar, Crédit Agricole Assurances, and Amundi, and other private investors. The sale results in a gross cash contribution of €4.6 billion.
- July 2018: On July 25, 2018, AccorHotels receives a binding offer from Colony NorthStar to acquire an additional tranche of 7% of AccorInvest’s share capital, for €250m. After completion of this transaction, which is subject to approval from the AccorInvest board of directors, AccorHotels will retain a 35.2% stake in AccorInvest’s share capital.
Why the Major Brands Have Been Shifting Asset-Light
Note: Parts of this section have been adapted from our report, “A Deep Dive Into Operating & Branding Strategies for Hotel Owners.” Please refer to that report for more detail on operating and branding strategies for hotel owners.
Accor isn’t the only company looking to reduce its exposure to owning and leasing hotel assets. Large public hospitality and major brand chains have increasingly shifted asset-light, some getting out of hotel ownership entirely, in recent years.
In conjunction with acquiring Starwood, Marriott — which had been asset-light since the 1990s when it spun off its real estate business into Host Hotels and Resorts — announced a plan to sell the Starwood hotels it had come to own through the merger. Hilton kicked off 2017 by spinning off its real estate and timeshare businesses into separate companies. Wyndham Worldwide and La Quinta have since done similar transactions, with Wyndham proceeding to acquire La Quinta’s franchise and management business. Extended Stay America is getting into franchising, and both Red Lion Hotels (RLH) Corporation and Hyatt announced asset sale programs in 2017 as well.
Why are the major brands recoiling from hotel ownership in favor of management and franchise agreements? We’ve identified three key reasons for the move:
1. The business models are more profitable. Management and franchise models are typically able to generate higher operating profit margins, returns, and free cash flow, relative to hotel ownership models. Franchise models are particularly stable given that royalties and other fees are substantially a recurring revenue stream. Both models have relatively low cost structures as well. We provide hypothetical income statements for owners, managers, and franchisors that demonstrate the high cash flow power of franchise and management models. For reference, hotel owner margins are typically in the teens to 20%-range, whereas hotel managers and franchisors have margins in the 50%- to high 60%-range.
Using reported financial data from the public hotel companies, we show hotel room portfolios broken down by franchised, managed, and owned or leased, and the companies’ year-to-date adjusted EBITDA margins. We also include three public hotel REITs (real estate investment trusts, Host Hotels, DiamondRock, and LaSalle) for reference, as they only own hotels and cannot franchise or manage hotels. Our analysis demonstrates that owning hotels is less profitable than franchising or managing hotels.
We note that Accor’s adjusted EBITDA margin recorded in the chart below is as of first-half 2018 results, as the company doesn’t report adjusted EBITDA on a quarterly basis. In addition, the company also doesn’t report an adjusted revenue number (which would deduct certain non-hotel related activities and items such as cost reimbursements), which may also be skewing results. Nevertheless, the company today continues to own or lease a higher number of hotel rooms relative to peers, resulting in lower profitability compared to companies such as Choice, Marriott, and Hilton.
2. The business models are more stable. Because franchise and management contracts are generally constructed as a percentage of revenue, the business models for franchise and management operations tend to be more stable during times of volatility such as economic recessions. Regardless of the hotel’s performance, the owner still has to pay the franchisor and manager fees. For example, we looked at franchisors Choice and Wyndham (excluding the timeshare segment for Wyndham) in 2007 and 2009 relative to asset-heavy hotel companies such as Hyatt and several public hotel REITs. Our analysis showed that while revenue growth and growth of asset-heavy companies significantly outperformed the asset-light hotels in 2007, the declines seen in 2009 during the financial crisis were severe, with revenues declining 8% more and adjusted EBITDA declining 16% more than asset-light companies. See the chart below for which companies were included in this analysis.
3. Asset-light model warrants a higher valuation. A lot of the major hotel brand chains are public companies, and therefore are focused on their stock price and valuation. Equity investors typically reward companies for being asset-light for several of the reasons already discussed, including higher margins, less volatility, less capital intensity, higher return on assets, and greater flexibility. Outside of expansionary periods, where revenue and EBITDA growth for asset-heavy hotel companies can far exceed asset-light, this translates into higher valuations for asset-light companies such as Choice, as demonstrated by enterprise value to next 12 months EBITDA (EV / NTM EBITDA) multiples. Over the time period included in the chart below, asset-light Choice had an average EV / NTM EBITDA multiple close to 13.3X, while an average of Hotel REITs (including DiamondRock, Host, LaSalle, Sunstone, RLJ, Apple Hospitality, Pebblebrook, and Xenia) and Hyatt, which are considered asset-heavy for their ownership of hotels, were 12.0X and 11.3X, respectively. The 5-year average is 14.8X for Choice, 12.7X for the Hotel REITS, and 11X for Hyatt.
What Going Asset-Light Means for Accor
Fewer Owned Hotels
As a result of the sale, Accor’s portfolio went from almost one-third of its hotel rooms being owned or leased to now having only 7% of its portfolio being owned or leased. Accor now owns or leases 74% fewer hotel rooms than it did as of year-end 2016.
Better Margins Going Forward
AccorInvest is now being de-consolidated because the company sold a 57.8% stake. Under accounting rules, Accor no longer has a controlling influence on the entity and must record AccorInvest using the equity method accounting rules, which is a way to assess the profits that belong to Accor for its 42.2% stake. The company also has the plan to sell its stake down over a number of years for additional cash.
Nevertheless, through the transaction, Accor set up long-term management contracts to continue operating the hotel assets in AccorInvest. As a result, Accor will generate management fees from the contracts, which will result in higher flow through to the bottom line versus owning and operating the hotels themselves as indicated by our hypothetical income statements above.
Accor’s current 2018 outlook implies a 1% EBITDA margin improvement (21% versus 20% in 2017), and we expect margins to only improve from here.
More Cash on Hand
We help readers better understand what the implications of generating cash from the transaction can mean for the company.
The sale of a 57.8% stake in AccorInvest resulted in a gross cash contribution of €4.6 billion. The company has three primary plans for this cash, of which we lay out the benefits here:
- Debt Paydown. Accor plans to reduce its debt balance by €1 billion. Having a lower amount of debt allows Accor to have a lower reported interest charge, which increases overall profitability. Also, having a lower debt-to-EBITDA profile can allow the company to be at an investment-grade level and more in line with peers, which allows it to obtain financing more easily in the future when it has projects or investments that require additional funds, rather than using cash on hand.
- Share Repurchases. Accor is implementing a two-year share buyback period to buy back €1.35 billion in shares, or about 10% of its share capital based on its market capitalization at the time. Share repurchases are a way to return capital to shareholders, rewarding them for their investment in the stock and trust in the company. Share repurchases may be done if the company perceives the shares to be undervalued, and mathematically, the process of buying back stock increases the company’s stock price. As the number of shares decreases, the price per share inevitably increases.
- Acquisition Opportunities. The rest of the cash is free for potential acquisition opportunities. And of course, the company has made several acquisitions since, including Mantra (~$920 million), a 50% stake in sbe Entertainment ($319 million), and an 85% stake in 21c Museum Hotels ($51 million), Mövenpick ($565 million), and an investment round in Travelsify ($5.8 million).
In conclusion, Accor’s decision to sell a majority stake in its owned assets has freed up the company to pursue other strategic objectives while also creating a stronger, more profitable and nimble company.
Diving In: Becoming an Experience Platform
AccorHotels is pursuing one of the most aggressive and interesting M&A strategies out of all its public hotel company peers. The company could be called a serial acquirer, making numerous acquisitions and investments in various sectors. In this way, the company can test out different opportunities, seeing what resonates with consumers and what doesn’t. Ultimately the company’s goal is to become an all-in-one travel experience platform that can cover any aspect of travel, any need or desire of consumers traveling, or even locals craving experiences in their areas.
“You need to make sure they are going to remain autonomous,” said Bazin. “If you impose the non-agile side of Accor, they are going to die and they are going to suffocate. I need to respect them. I need to make sure they remain independent, but I also want to make sure I take from them what I need.
“[It’s a] very fine equilibrium between autonomous and what I need. We’ve made 12 to 17 investments,” he continued, “and I really believe that 20 percent of them will not work. Wrong equilibrium, team, or idea, or maybe too late. Twenty to 50 percent will be remarkable, and a third will be average. This is the name of the game when you enter into unknown territories.”
In this section, we provide an overview of the acquisitions and investments Accor has been making. Then, we take a look at different ways of measuring Accor’s success with these investments via stock price performance, growth in overall value as measured by enterprise value, an overview of how Accor stacks up relative to the Boston Consulting Group’s five key ingredients of successful M&A, and growth in new business segment’s revenue and earnings.
Accor’s Acquisitions, Investments, and Strategic Partnerships
Since October 2014, AccorHotels has made around 30 acquisitions, investments, or strategic partnerships, which we detail in the table below. The company has made investments in luxury hotel companies, international hotel companies, co-working spaces, concierge, dining, event services, digital booking platforms, and more.
The average purchase price per transaction, where data is available, is $235 million. The median is $26 million.
Measuring Success: Stock Price Performance Analysis of Acquisitions
One way to assess Accor’s acquisition strategy is to see how stock investors react to the different announcements. In this analysis, we calculate the stock price return the day of the announcement of a given acquisition, partnership, or investment. We assess this return relative to the return of the CAC 40, which is a benchmark French stock market index. The index tracks the performance of the 40 largest French stocks based on the Euronext Paris market capitalization. It makes sense to compare Accor versus this index, rather than the S&P 500, for instance, because the company is a constituent of the index and trades on the Euronext.
Our analysis suggests that, on announcement days, Accor’s stock price outperformed the CAC 40 by 0.6% on average. The highest outperformance was 3%, and the lowest underperformance was -2.2%.
We note there are likely other market and idiosyncratic factors in play. Nevertheless, the average should be an indicator that, on average, investors view Accor’s acquisitions and investments favorably generally.
Measuring Success: Serial Acquirer Strategy
A.T. Kearney did some research in 2015 suggesting that serial acquirers increase value faster and investors assign a higher value to these companies over infrequent buyers. In this instance, value is analyzed based on enterprise value, which is a measure of a total company’s takeover value, calculated as market capitalization + debt + minority interest + preferred stock – cash and cash equivalents. Their analysis of 500 public companies in developed markets suggested that the enterprise value compounded annual growth rate was 25% higher for frequent buyers (more than five acquisitions over the period 2009 to 2013) than for non-buyers (those with no acquisitions over the same period). Frequent buyers’ enterprise value to EBITDA (EV/EBITDA) valuation multiples were 30% higher on average than for non-buyers.
We performed a similar analysis using the top 100 serial acquirers of the S&P 500 over the time period November 2013 to November 2018. We divided the top 100 acquirers into four quartiles where the average number of transactions over the five-year period were 40, 17, 13, and 10 transactions, respectively. We note companies were only included if data was available for the time periods required. We also included a number of publicly-traded hotel brand companies (Marriott, Choice Hotels, Hyatt, and Intercontinental Hotels), which had on average three transactions over the time period, to compare versus AccorHotels.
Our analysis shows that, on average, the first quartile of serial acquirers (40 transactions on average) created the most value (as measured by enterprise value) over the five-year period. However, AccorHotels did not when compared to hotel brands.
Interestingly, the first quartile did not have higher valuation multiples on average (as measured by enterprise value to EBITDA) over the time period relative to the second and third quartiles, but did when compared to the fourth. AccorHotels had a slightly lower valuation on average than hotel brands.
Nevertheless, we note that when it came to growth in valuation multiples, AccorHotels outpaced that of hotel brands and all top 100 serial acquirers in the S&P 500. The first quartile outpaced the second and fourth quartile, but not the third.
There are numerous factors that could explain or could be impacting these results. However, we think the overall analysis suggests that acquisitions can create value and lead to valuation growth.
Measuring Success: Common Themes of the Transactions
Skift Senior Hospitality Editor Deanna Ting highlights a few key categories that Accor tends to focus on when its comes to acquiring companies in a 2017 article on everything Accor had acquired or invested in up until that point. She notes Accor joined the alternative accommodation revolution (Onefinestay, Squarebreak, Travel Keys, Oasis), expanded its luxury portfolio (Fairmont Raffles, Banyan Tree), formed strategic hotel partnerships to grow globally (Huazhu, 25hours Hotels, Rixos Hotels), added complementary services (John Paul, Potel & Chabot, Noctis, Nextdoor), and driving bookings (Fastbooking, VeryChic, Availpro).
The Boston Consulting Group did some research in 2011 in their work, “Does Practice Make Perfect? How the Top Serial Acquirers Create Value.” The research finds five key ingredients of successful M&A, or four types of targets and when they time their deals at the right moment. We discuss these categories and assess Accor’s performance relative to those findings.
Target distressed businesses. Distressed business typically are in need of restructuring or reorganization, and companies that are able to achieve this most successfully can see stronger returns on investment relative to acquiring healthy businesses.
Keep transactions relatively small. This allows acquirers to limit their financial risk and build scale, knowledge, and experience on their own.
Concentrate on private companies. Private companies are generally less liquid than public companies, resulting in likely lower acquisition prices. Specialized knowledge about the private company can be developed without public filings, thereby limiting potential competition.
Search for targets on other continents. International acquisitions can be a way to expand geographic scale, increase diversification, and manage complex global markets outside of the company’s normal expertise.
Ask yourself: Is now the right time? Serial acquirers typically execute a large portion of their M&A in low-premium environments (to get the best deals) and right before the start of an M&A wave (so they can acquire the best targets available).
Measuring Success: New Businesses
Another way to measure Accor’s success with its acquisition strategy is to look at the financial performance of its new business operation segment. The segment includes new businesses acquired primarily through acquisitions including digital services (Fastbooking, Availpro), private rentals (Onefinestay, Travel Keys, Squarebreak), digital sales (VeryChic), hotel distribution solutions (Gekko), restaurant reservations, and concierge services. This segment includes acquisitions of companies that are fully consolidated within Accor’s financial results.
The new business segment has been growing tremendously as a result of new acquisitions. Revenues were up 61.5% year-over-year at €70 million in the first half of 2018, and up 27.1% in Q3 2018 (versus Q3 2017) at €40 million.
However, on a like-for-like, or “same-store” basis, revenue was up 7.1% in the first half of 2018, but down 5.8% in Q3 2018. The company also noted in 1H 2018 results that EBITDA was down 53.7%.
The mixed results are primarily due to John Paul and Onefinestay, where synergies and scaling plans have not delivered as expected combined with incremental development costs. During 1H 2018 results, the company recorded a provision for impairment for an aggregate amount of €246 million.
Nevertheless, the rest of the group excluding John Paul and Onefinestay is performing very well, with growth of almost 20% in Q3 2018.
While the company is currently guiding to a €25 million loss for the segment in 2018, the company has also been indicating the segment could break even in 2019. We expect it is possible that the operating segment excluding John Paul and Onefinestay will break even in 2019, but it will likely take some time to rightsize the private rental business and corresponding concierge services.
“Just as a point, we do firmly believe that those new businesses are an important part of our ecosystem going forward,” Deputy CEO and CFO Jean-Jacques Morin indicated on the 1H 2018 earnings call. “Whether it is services to private homes, concierge and that we’ll deliver over time a strong potential to the group ecosystem and so we’ll take the actions as relevant in order to make that a reality.”
Other Areas of Company Strength
While this report has centered on Accor’s sale of HotelInvest and the company’s inorganic growth strategy, there are other areas of focus for the company that should be highlighted.
- Geographic diversity. Many consider Accor to be a small player among major brand companies such as Marriott and Hilton. However, it is worth noting that the company has the leading market share in all regions outside of the Americas. This includes Europe, Middle East and Africa, and Asia Pacific, which are also high-growth markets globally. The company has made a number of strategic acquisitions and partnerships to help develop its geographic diversity and works with local owners and managers to better develop economies and gain local knowledge and expertise.
- Fairmont Raffles acquisition. Accor acquired Fairmont Raffles in July 2016 for $2.7 billion, adding three luxury brands to its portfolio — Fairmont, Raffles, and Swissôtel — with 56,000 rooms, almost half of which are located in the Americas. In addition to gaining access to the company’s three million loyalty members, 75% of whom are located in North America, Accor has strengthened its luxury and upscale results. Accor’s luxury and upscale 2017 RevPAR was 18% higher than in 2015, and 9% higher than in 2016. On a same-store basis, the company has been demonstrating solid results as well. In addition, Accor was able to pull out €65 million in synergies ahead of schedule after the transaction closed, thus improving the financial results of the overall company. The transaction has resulted in Accor not only adding geographic diversity to its portfolio, but also becoming an industry leader in the luxury segment.
- Huazhu partnership. In early 2016, Accor finalized a strategic partnership with China-based Huazhu (listed as China Lodging) to develop its economic and midscale brands in the region. Accor also took a 10.8% stake for $193 million in the share capital of Huazhu, and Bazin joined Huazhu’s board of directors. Huazhu, in turn, took a non-controlling stake of 29.3% and two board seats in AccorHotels’ luxury and upscale operating platform for greater China. During the April 2018 shareholder update call, Accor indicated that the company had doubled its offering in China in the past two years by developing over 70 new hotels as a result of the partnership, and continues to develop its luxury and upscale brands with the help of Huazhu as well. At the time of the announcement of the partnership, Accor indicated plans to open 350 to 400 hotels over the next five years. As of February 2018, Accor’s investment in Huazhu had increased more than five times. The partnership allows Accor to grow strategically in China, with the help of a partner who has considerable local and policy-related expertise.
- Digital Strategy Transformation. In October 2014, Accor announced a digital strategy transformation plan to “rethink and incorporate digital technology throughout the customer journey, improve the services on offer for investor partners, and consolidate the Group’s distribution market share.” The goal was to invest €225 million between 2014 and 2018 (capital expenditure 55% and operating expenditure 45%) with 60% being invested to consolidate the company’s operations by improving middle- and back-office solutions, with the remainder going toward expanding market share and optimizing distribution costs. Since then, the company has made investments in a number of digital travel tech startups, and improved its overall digital presence. Accor’s look-to-book rate is 4.5 times that of 2014; there are 9 million price updates per day versus 4 million in 2014; and there is a booking every 1.7 seconds.
Company Model and Estimates
We built a model for AccorHotels to forecast 2018 results based on various ongoings at the company. We provide our expectations versus consensus expectations and management guidance below.
- We forecast Group RevPAR growth (on a comparable, or “same-store” basis) of 5.1% (versus 4.7% in 2017). We expect:
- Ongoing strength in Europe (6% versus 7.1% in Q3 2018), with particular strength in France, Germany, and the UK.
- Solid growth in Asia Pacific (3% versus 3.1% in Q3 2018), with supply issues in Australia offsetting strength in China somewhat.
- Ongoing strength in Middle East and Africa (3% RevPAR growth versus 5% in Q3 2018, Q3 included the Hajj). The company recently increased its exposure to this region as a result of the Mövenpick acquisition from 7% to 9% and now has a leading position in Mecca.
- Strong growth in North and Central America and Caribbean (5% versus 4.6% in Q3 2018), primarily due to ongoing strength in the Fairmont brand.
- Soft growth in South America (1% versus 11.2% in Q3 2018), as we finish the Rio Olympics comparison issues and Brazil continues to demonstrate oversupply and political uncertainty.
- We forecast €3,470 million in total revenue including HotelServices, new business, hotel assets and other, and holding and intercompany eliminations.
- RevPAR growth combined with room growth of 8% translates into €2,557 million in revenue for HotelServices in 2018.
- Growth in new business continues to be solid. Management noted on the Q3 2018 call that new business average growth was up close to 20% excluding Onefinestay and John Paul.
- We expect growth in hotel assets and other will remain high, given Mantra and Mövenpick are now included. We forecast growth of 60% in revenues versus 64% in Q3 2018.
- The company tightened guidance during Q3 2018 earnings to €700 to €720 million in 2018E EBITDA. We forecast €715 million, above the midpoint of the range due to some margin improvement and an assumption of management conservatism.
- We do not assume any additional acquisitions.
We would be remiss not to include any risks to AccorHotels’ current strategies and financial performance.
Our current expectations are for steady, stable growth in the U.S., and solid growth internationally for the hospitality industry. Because AccorHotels is such a diversified company geographically, we expect this to provide some risk mitigation.
While Accor’s acquisition strategy provides a significant amount of opportunity for the company, its inability to close additional deals may limit its growth going forward. In addition, any bad investment or acquisition that goes under or performs poorly financially for the company, may prove to be a costly mistake.
Accor recently recorded a provision for an impairment in Onefinestay and John Paul of $288 million (€246 million). During the company’s Q3 2018 call, Deputy CEO and CFO Jean-Jacques Morin noted that “Onefinestay and John Paul posted negative growth following the strategic review we initiated last summer.
“It is the usual story about how a new business is being integrated in the company and [the company] probably being too greedy [about] … integrating them too [quickly] …, and pushing them into too many geographies and too many directions,” he said. “I think I would summarize it like that. So, what we’re doing right now is make sure that we are focused on really making money and … [managing things well], which is why you see the negative revenue of Q3.”
In some ways, it feels like Accor put the cart before the horse, trying to ride the wave of the private rental trend, without being fully prepared to help the companies safely grow. Nevertheless, the alternative accommodations industry is a $150 billion industry, and there should be a space for Onefinestay and corresponding concierge services through John Paul. Nevertheless, this somewhat hasty slipup could prove to be an indicator of what could happen with other investments and acquisitions that Accor makes.
“Our strategy has not changed,” Morin said. “We want to do that with private rental. We want to move ahead with John Paul. And at this stage, it’s too early to tell you what our solution is, but that’s what they would say at that point. The other thing that I would like to highlight, as you know, is that despite being small numbers, this is important for us.”
It’s been two years since the acquisition of Fairmont, and Accor has finally merged all of its multiple loyalty programs. The four million or so members of the Fairmont President’s Club, Swissôtel Circle, and Raffles Ambassador programs are now a part of Le Club AccorHotels, bringing the total number of members to around 45 million.
In our report, “Perspectives on Hospitality Loyalty Programs 2018: A Challenging Road for Real Customer Loyalty,” we took a look at the loyalty programs of seven major hospitality companies to assess how the various programs stack up relative to each other. Here, we reassess our Loyalty Brand Matrix to see if any changes have been made. Categories of the matrix are located in the appendix of this report.
The seven metrics we included in this analysis are as follows:
- Loyalty Members: Brand chains with the largest loyal followings theoretically have the greatest population to target versus having to rely on OTA customers. Note: We are likely overly punitive in this category toward Hyatt, as Hyatt only discloses its active loyalty members.
- Loyalty Contribution: Either disclosed in the company’s 10-K filings, investor presentations, or other various filings, this is the percentage of room nights or occupancy (depending on how the brand defines it) that comes from loyalty members.
- Rooms per Member: A Skift metric that attempts to demonstrate the breadth of the portfolio offering available to loyalty members. The higher the metric, the greater the breadth.
- Rooms per Country: This is defined as the total number of rooms divided by the number of countries and territories that the major brand chain operates in. This is another metric to demonstrate the breadth of a portfolio.
- Direct Traffic: SimilarWeb estimates the percent of desktop traffic that comes via direct. Although this is not a perfect metric for the percentage of direct bookings, we assume the more direct activity on a website, the better the brand loyalty.
- Social Following Rank: We took the average rank of Facebook likes, Twitter followers, and Instagram followers for the company’s main loyalty or concierge services-type account. If no loyalty account was available, we went with the corporate account. A stronger social following not only suggests that the brand has a loyal customer base, but that the company recognizes the importance of having a social media presence with guests.
- Average Consumer Sentiment 2013–2017: Discussed later in this report, we worked with Crimson Hexagon, an AI-powered consumer insights company, to perform an analysis of online consumer sentiment toward loyalty programs. We ranked the companies by the highest average sentiment over the time period of January 1, 2013, to December 31, 2017. Marriott’s average includes 2017’s average ranking for Starwood’s program, as the company was acquired by Marriott toward the end of 2016.
- Skift Research, “A Deep Dive Into Operating & Branding Strategies for Hotel Owners.” February 2018
- Skift Research, “Perspectives on Hospitality Loyalty Programs 2018: A Challenging Road for Real Customer Loyalty.” April 2018
- Skift, “Video: Why AccorHotels CEO Wants Even More Brands.” July 2018
- Skift, “Everything AccorHotels Has Acquired and Invested in Over the Past Year.” April 2017
- Skift, “Accor Finalizes $2.7 Billion Purchase of Fairmont Raffles.” July 2016
- Skift, “AccorHotels Takes $288 Million Hit on Onefinestay and John Paul Investments.” July 2018
- Skift, “AccorHotels Finally Combines Fairmont, Raffles, and Swissôtel Loyalty Programs With Its Own.” July 2018
- The Boston Consulting Group, “Does Practice Make Perfect? How the Top Serial Acquirers Create Value.” 2012
- Bangkok Post, “In Mergers & Acquisitions practice makes perfect.” February 2012
- A.T. Kearney, “Build Your M&A Muscle: Why Serial Acquirers Win at Value Creation.” 2015
- The Financial Times, “Global dealmaking reaches $2.5tn as US megadeals lift volumes…” June 2018
- The Financial Times, “Record ‘megadeals’ push global takeovers beyond…” March 2018