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2015

Following pressure from activist investors Starwood (SPG) has retained the services of Lazards to consider a "nothing ruled in and nothing ruled out" strategic review of its future, that could include buying up a competitor, or as caught the headlines, selling itself to another. Arne Sorensen on behalf of Marriott jumped into the fray on Wednesday saying having cast an eye over the sums he wasn't interested. Hilton ruled itself out yesterday. Which rather reminded me of a story that emerged last year, stating IHG had announced itself as amenable to approaches. None were made.


 

So, nobody wants to buy SPG, or IHG. But both might be for sale. SPG is a rising star that has recently stalled, IHG is a leviathan that seems to have lost its way in the mediocrity of its established brands, for although it may boast a dozen or so brands, in reality there's only 2 that are well known to the public, Intercontinental and Holiday Inn. More regular travellers will also be aware of Crowne Plaza. None are viewed as particularly desirable. SPG has a reputation for sprinkling the stardust. Could SPG's stardust brighten up IHGs humdrum properties?


Like the other hospitality groups, IHG has a dozen or so brands, also like the others, the vast majority of inventory is tied up in just a few leading ones, namely:


Intercontinental (IC). 5-star gateway-city downtown and airport hotel group. Mainly aged properties with all the issues that arise therefrom, even if the hotel is paying the attention to maintenance detail demanded in this segment, which they're not! Trading on its name, it has little else of substance to offer.


Crowne Plaza (CP). 4-star mainly city-centre and airport group, likewise suffering from aged properties and inadequate maintenance. It's most recent initiative was a few years ago with its sleep advantage system, miniature room and pillow sprays. That's faded away, a bit like the brand.


Holiday Inn (HI). 3-star utterly ubiquitous household-name chain. If the decors green, most of the western world knows what hotel they're in! Alas, a surfeit of aged properties subject to even less maintenance than the other two have taken their toll on a previously trusted name. In about 2008 IHG announced a major rebrand strengthening its HI standards and a new logo. No sooner had the ink dried than the financial crisis hit and franchisees were simply unable to find the cash to invest. The new standards were relaxed and extra time given to rebrand, which at some properties consisted of little more than nailing up the new brand sign. Job done! Not!


But amongst this depressing story of mediocrity there are some fabulous hotels in each brand. IHG was also one of the trailblazers with its Holiday Inn Express chain.


Holiday Inn Express (HIX). After a head start in the USA, new HIX hotels have sprung up at freeway intersections, city centres and industrial parks all over Europe to the same room design and frequently, same actual building design too. Priced between €40-€100 per night, these new, clean properties have reinvigorated IHGs stale image. Well, OK, not that much, but IHG did see into the future here, much the same way as SPG led with the "W" brand that others so want to ape, and indeed Marriott with its "Autograph" that SPG has just copied as "Tribute". But HIX is the big one here, chasing the mass market, relatively cheap to develop, well liked by consumers, whether value-seeking business or families on leisure stays, it's high-quality room, low-price-with-breakfast proposition means it's grown exponentially here in Europe, as well as in the USA. And it is in these 2 areas that SPG is deficient. It's seriously short in Europe, the worlds largest single market. And it's seriously short on a high-quality-low-price proposition. Sure it has the brand, 4-points, but nothing like the reach. IHG is the largest hotel brand in Europe. SPG needs that exposure. IHGs HIX is everywhere. And IHG remains cheaply valued by the market, one swallow does not make Spring. HIX success alone is not enough to turn around the money markets view of the IHG supertanker.


IHG needs some stardust. And SPG does have that. So, a takeover by of IHG by SPG would be a match made in heaven, right?


Well the proposition has clear advantages, overnight SPG goes from being a virtual joke-chain in Europe to a leading presence in almost accross the EU. It adds significantly to its Chinese inventory making it the pre-eminent western chain there too, and fills in its many, many gaps in the still-vital USA market. Of course it faces some duplication issues, though because of Starwood's own barely perceptible EU presence, not many there. China's growth is such that whatever duplication there is in China shouldn't be a problem for long. And of course the vast majority of IHGs USA inventory is HI or HIX, both in markets woefully under-represented by the SPGs brands. Turning to IC, SPG has no equivalent, Westin is a more modern 5-star biz-hotel chain than IC, which is much more a Starwood/Marriott plus an extra star. So something could be done there. Alas, where CP hotels and Starwood hotels duplicate something may have to give. All the same, this merger shouldn't lead to a large sell-off. It's a pretty good fit. Of course IHG won't be taking over SPG, so SPG's vociferous activist-investors would need to dig deep. But then they are activists, yes?


So assuming SPG could raise the finance, a big assumption I admit, what to do? Well, many IC franchisees would need up their game and be forced to refurbish, but the brand name has a beloved history with its links to PanAm and it can be differentiated from Westin. Some ICs and the better CPs should be relatively easily rebranded to Starwood. The smaller IHG brands should be decided on a case by case basis, keep some brands, dump others, rejig properties into the expanded portfolio. The elephant in the room here is Holiday Inn, and by association, Holiday Inn Express. Make no mistake, along with IHGs European presence, the worldwide HIX is a major prize for Starwood. But the question is whether to keep the HIX brand name and move the properties within the unloved 4-points chain over. It should be an easy yes, but as HIX is a derivative of HI, does it make much sense in keeping with the HIX brand if HI is not to be used post takeover? And would it create value to strip out those HIs that can't make SPGs 3-star grade and spin off Holiday Inn as an entirely separate entity competing in the lower end, more variable of the brand markets, Best Western, Days Inn, Super 8, etc, etc. If so, then what value is there in retaining the HIX brand, and will it suffer brand confusion with the inferior spun-off chain?


If there's any hotel brand that's more associated with a reputation for aged inventory, creaking infrastructure, brand inconsistency and brown furniture than Holiday Inn, I can't think of it. HI hotels are clean, that's about it really. So, what to do with Holiday Inn? Well getting rid of the hotels isn't really the answer. It's here, in this Holiday Inn/Hilton Garden Inn/Courtyard and Holiday Inn Express/ Hampton/ Fairfield Inn markets that SPG needs to strengthen its representation, selling off the HI properties would defeat that element of the takeover. On the other hand, a lot of these inconsistent HIs on SPGs books could sully the brand. Clearly whatever the name of the 3-star brand, the standards need to be strengthened and a good number of HIs just won't be able to find the enormous funds to correct decades of decay. And depending upon how highly SPG raises the bar, will depend on how many fall. Since a good part of the raison D'être for this merger is mid-market small-town exposure, filling in SPG's embarrassing US gaps, it's going to be important to keep many of these ageing properties on board. Another role for the activist investor methinks?


So once the standards of the 3-star chain have been set, the next question is the brand. Holiday Inn may be well known as a brand, but it's not held in high esteem. IHGs half-hearted rebrand hasn't helped, over-promising and under-delivering means that even if SPG announced its own rebrand for HI, few amongst the staying public would believe it'll make any difference, after all, the last one didn't. And of course, nothing quite says business hotel like Holiday Inn, erm.... Against that, it's a well known name, and with time and effort couldn't its fortunes be reversed? And there's another reason to keep the name, the well respected HIX. Keeping HI would make the HIX or 4-points debate a no-brainer, bye-bye 4-points. No flowers.


And then we get to the debate about loyalty programs. Which one to keep, SPG or IHG? Yes, as I suspected, the shortest paragraph of all. I'm an IHG Plat, where do I sign for SPG? Gimme, gimme, gimme...