InterContinental Hotels is reportedly close to buying Fairmont Raffles, which owns luxury assets such as the Savoy in London, and Morgan Stanley analysts are positive on the idea.
The bank said any such deal would be a good fit for InterContinental, since it is weak in the luxury segment, although Fairmont was likely to command a high price. With a possible $1.5bn buyback by InterContinental, a purchase of Fairmont for a reported £1.9bn would make it hard to boost earnings per share in a material way if the share repurchase went ahead. Morgan Stanley’s Jamie Rollo said:
Press reports (Sunday Times) suggest that InterContinental is closing in on a deal to buy Fairmont Raffles for £1.9bn. Sources suggest InterContinental has beaten rivals including Wyndham and Accor, and is likely to seal the deal “within weeks”. Neither party has commented, but we note that InterContinental has not put out a statement denying the rumour, as it did after the Starwood takeover rumour (though the company said it was required by the authorities to put out a statement that time).
Fairmont, which as well as the Savoy also owns the Plaza in New York, the Peace Hotel in Shanghai, and Raffles Singapore, is owned by Qatar-based Katara Hospitality and Saudi Arabia-based Kingdom Holdings. It would fit with InterContinental, given the company recently admitted a strategic gap in the luxury market.
InterContinental also has funds available. It is about to receive $930m from the sale of its Hong Kong hotel and still has $363m from the sale of its Paris hotel. Morgan Stanley’s Rollo said:
Having performed well both operationally and financially since its 2003 demerger, and with the Hong Kong and Paris hotel disposals completing its move to an asset light model, we think InterContinental management feel they are in a strong position to invest for growth. Unencumbered luxury hotel brands don’t come around that often, and the conundrum InterContinental likely faces is having to justify a multiple potentially double that on which its shares trade, and thus forfeit the more immediate and relatively safer upside from a large share buyback.
With its shares on under 11 times 2016 estimated EBITDA and 17 times PE (post our current assumption of a $1.5bn buyback), we think they are good value for a high quality hotel business operating in a cycle where we see further upside, and we rate them overweight.
However in a falling market InterContinental is currently down 56p at £22.72.
