Consolidation could be new norm for boutique sector
Recent M&A activity within the boutique and lifestyle hotel space, including SBE’s planned purchase of Morgans Hotel Group, is changing the segment’s landscape.
The boutique and lifestyle segment of the hotel industry is riding a wave of change, propelled forward by a series of transactions and mergers.
Analysts, experts and longtime boutique hoteliers said they believe the wave of consolidation is in some ways a necessity, as the larger industry grapples with the need for size, but it can be difficult for those who operate specifically in this space.
Boutique hotel pioneer Ian Schrager said he expects boutique and lifestyle hotel companies will be targets for larger companies, like the Marriott Internationals and Hilton Worldwide Holdings of the world, which will in turn fuel greater consolidation in the space. He said it makes sense because the smaller companies can plug into the larger companies’ economies of scale and distribution machines while maintaining their unique experience for guests.
“People want an elevated experience,” Schrager said. “They want good rates and good location, but that is not enough. Everybody wants convenience with an elevated experience.”
Mike Depatie, managing general partner of KHP Capital Partners and former Kimpton Hotels & Restaurants CEO, said the wave of mergers and acquisitions is a symptom of where the industry is in the cycle.
“You get to a point where value looks compelling on the sell side, and buy-side capital is available,” Depatie said.
Boutique/lifestyle M&A
While recent consolidation in the boutique space can be tracked back to 2011 at least with the merger of Joie de Vivre Hospitality and Thompson Hotels under the umbrella of Commune Hotels & Resorts, the trend has picked up steam following InterContinental Hotels Group’s acquisition of Kimpton in early 2015.
Since that point, Commune was once again an M&A player when it merged with Destination Hotels in January.
The most recent headline-grabbing move in the space is SBE’s planned purchase of Morgans Hotel Group, which was announced 9 May and is scheduled to close by the end of 2016.
That deal has an all-in price tag of $794 million—the majority of which is debt—and is seen by many as a lifeline for the struggling New York-based company.
“The company was too small,” said Chris Agnew, managing director at MKM Partners and one of the few analysts who covered Morgans in the months leading up to the merger announcement.
“They fell into the nasty trap of being overly reliant on the (online travel agencies) because of their scale and the pressure to make quarterly numbers,” he said. “And if you fill the Hudson with OTA business, then that’s a place you don’t want to go because it’s full of wacky German tourists. It’s completely uncool now.”
Officials with Morgans declined a request for interview, and SBE officials had not responded to requests as of press time.
Morgans’ struggles
Sources had differing opinions on exactly what fueled Morgans’ problems, but they all acknowledged that the company was doing relatively poorly. They also said the marriage with SBE could be a fruitful one for both sides.
Agnew pinned at least some of the company’s problems on the decision to go public, its size and in-fighting among executives, board members and shareholders.
Morgans “does have goods but has been starved of capital,” he said. “And some conflicting capital interests have caused some conflict on the board, certainly historically but perhaps that’s been somewhat resolved. This agreement seems to address all those issues.”
Agnew said the company was hampered by being publicly traded.
Schrager, who founded Morgans in the 1980s and sold the company in 2005, said he doesn’t believe the fact that Morgans was public was the primary problem, but he acknowledged he isn’t intimately familiar with the business after his departure. However, he believes company executives were focusing on the wrong things.
“When I left the company, if they had decided to do the best hotels out there, like Kimpton, then it could’ve been a great business,” he said. “But they were trying to do the hippest. And I think that was a mistake.”
Several sources agreed that Morgans’ focus on being incredibly trendy and fashionable was difficult to maintain.
“For a while, they were the ‘too cool for school’ guys,” Depatie said. “That worked for a while, but they couldn’t keep it going.”
Sources said it was well known within the industry that Morgans officials were looking for a buyer for years. Depatie said he was approached multiple times during his tenure at Kimpton, but a deal never made sense from his perspective because the cultures of the companies didn’t mesh.
“This is one particular business where you have to look very carefully at combining companies,” Depatie said.
But he said he believes Morgans found the right home with SBE and founder and chairman Sam Nazarian.
“Sam Nazarian is a good guy to take it over,” Depatie said. “And (SBE) got (Morgans) for what appears to be a very good price, although a lot of debt is involved.”
The benefits of size
Chip Conley, head of global hospitality and strategy for Airbnb and founder of Joie de Vivre Hospitality, agreed with Schrager that boutique hotels can benefit from being tied into the power of larger companies.
“There’s an infrastructure question,” Conley said. “How do (boutique hotels) have power in the marketplace, whether through loyalty programs or Expedia commission levels or corporate sales teams?”
Jonathan Falik, founder and CEO of JF Capital Advisors, said he expects to see more consolidation among boutique and lifestyle hotels for those same reasons and because the size of larger companies can let boutique hotels focus on what they’re good at instead of some of the nuts and bolts of running a hotel business.
“Rather than cannibalize or put resources where they don’t belong, they can do something truly independent,” Falik said. “There are a lot of fixed costs in things like revenue management or social media management. And they can save money by tying into a larger company on things like insurance coverage.”
Schrager said the benefits of consolidation aren’t exclusively enjoyed on the boutique side of the equation. He cited his work with Marriott’s Edition collection as an example of how the culture of boutique hotels can improve the experience across brands for a larger company.
“The mergers that work are the ones where they find out how to take the best from the company they’re acquiring and combine that with what their company can add to it,” he said.
What’s next
Several sources said they expect consolidation to continue in this portion of the industry. Conley said he believes the push can leave two types of boutique hotel companies—those attached to larger companies and small, likely regional players.
“There’s a point of view that you can either be really, really small and profitable or be big, but you don’t want to be sort of in the middle of the road,” Conley said. “You can say a midsize boutique hotel company is always stretching and having to spend money on infrastructure.
“If you stay small, you can spend your money on just a few projects, or if you’re big you can leverage that,” he added. “But if you’re midlevel you always have to risk not having that infrastructure or invest in it and constantly let it limit your profits.”
Schrager said he disagrees that there will be specific sizes where boutique hotel companies can thrive, but he said more companies will be adopting the boutique/lifestyle way of thinking based on guests’ desires. He said the key going forward will be finding ways to couple that while providing value, which could drive further consolidation.
“Good value and appropriate pricing will become more and more important for everybody, including those who are rich and those who aren’t rich,” he said. “Nobody wants to get ripped off.”
Depatie said hoteliers will need to balance size with uniqueness as consolidation continues.
“Scale can potentially work against you,” he said. “When you try to make individual properties, as you get bigger it gets more tempting to do the same thing you’ve done before. Then you become less innovative as you need to grow faster.”
Even with greater consolidation, though, Conley said boutique hotels will always be a space for innovation within the greater hotel industry.
“Boutique hotels are still a real estate business, and that’s always localized,” he said. “There will always be a market for a few new, typically young innovators who want to create a hotel company. That will really give people the ability to constantly have fresh blood come into the hotel market, and that’s good news.”
Source: hotelnewsnow.com
The boutique and lifestyle segment of the hotel industry is riding a wave of change, propelled forward by a series of transactions and mergers.
Analysts, experts and longtime boutique hoteliers said they believe the wave of consolidation is in some ways a necessity, as the larger industry grapples with the need for size, but it can be difficult for those who operate specifically in this space.
Boutique hotel pioneer Ian Schrager said he expects boutique and lifestyle hotel companies will be targets for larger companies, like the Marriott Internationals and Hilton Worldwide Holdings of the world, which will in turn fuel greater consolidation in the space. He said it makes sense because the smaller companies can plug into the larger companies’ economies of scale and distribution machines while maintaining their unique experience for guests.
“People want an elevated experience,” Schrager said. “They want good rates and good location, but that is not enough. Everybody wants convenience with an elevated experience.”
Mike Depatie, managing general partner of KHP Capital Partners and former Kimpton Hotels & Restaurants CEO, said the wave of mergers and acquisitions is a symptom of where the industry is in the cycle.
“You get to a point where value looks compelling on the sell side, and buy-side capital is available,” Depatie said.
Boutique/lifestyle M&A
While recent consolidation in the boutique space can be tracked back to 2011 at least with the merger of Joie de Vivre Hospitality and Thompson Hotels under the umbrella of Commune Hotels & Resorts, the trend has picked up steam following InterContinental Hotels Group’s acquisition of Kimpton in early 2015.
Since that point, Commune was once again an M&A player when it merged with Destination Hotels in January.
The most recent headline-grabbing move in the space is SBE’s planned purchase of Morgans Hotel Group, which was announced 9 May and is scheduled to close by the end of 2016.
That deal has an all-in price tag of $794 million—the majority of which is debt—and is seen by many as a lifeline for the struggling New York-based company.
“The company was too small,” said Chris Agnew, managing director at MKM Partners and one of the few analysts who covered Morgans in the months leading up to the merger announcement.
“They fell into the nasty trap of being overly reliant on the (online travel agencies) because of their scale and the pressure to make quarterly numbers,” he said. “And if you fill the Hudson with OTA business, then that’s a place you don’t want to go because it’s full of wacky German tourists. It’s completely uncool now.”
Officials with Morgans declined a request for interview, and SBE officials had not responded to requests as of press time.
Morgans’ struggles
Sources had differing opinions on exactly what fueled Morgans’ problems, but they all acknowledged that the company was doing relatively poorly. They also said the marriage with SBE could be a fruitful one for both sides.
Agnew pinned at least some of the company’s problems on the decision to go public, its size and in-fighting among executives, board members and shareholders.
Morgans “does have goods but has been starved of capital,” he said. “And some conflicting capital interests have caused some conflict on the board, certainly historically but perhaps that’s been somewhat resolved. This agreement seems to address all those issues.”
Agnew said the company was hampered by being publicly traded.
Schrager, who founded Morgans in the 1980s and sold the company in 2005, said he doesn’t believe the fact that Morgans was public was the primary problem, but he acknowledged he isn’t intimately familiar with the business after his departure. However, he believes company executives were focusing on the wrong things.
“When I left the company, if they had decided to do the best hotels out there, like Kimpton, then it could’ve been a great business,” he said. “But they were trying to do the hippest. And I think that was a mistake.”
Several sources agreed that Morgans’ focus on being incredibly trendy and fashionable was difficult to maintain.
“For a while, they were the ‘too cool for school’ guys,” Depatie said. “That worked for a while, but they couldn’t keep it going.”
Sources said it was well known within the industry that Morgans officials were looking for a buyer for years. Depatie said he was approached multiple times during his tenure at Kimpton, but a deal never made sense from his perspective because the cultures of the companies didn’t mesh.
“This is one particular business where you have to look very carefully at combining companies,” Depatie said.
But he said he believes Morgans found the right home with SBE and founder and chairman Sam Nazarian.
“Sam Nazarian is a good guy to take it over,” Depatie said. “And (SBE) got (Morgans) for what appears to be a very good price, although a lot of debt is involved.”
The benefits of size
Chip Conley, head of global hospitality and strategy for Airbnb and founder of Joie de Vivre Hospitality, agreed with Schrager that boutique hotels can benefit from being tied into the power of larger companies.
“There’s an infrastructure question,” Conley said. “How do (boutique hotels) have power in the marketplace, whether through loyalty programs or Expedia commission levels or corporate sales teams?”
Jonathan Falik, founder and CEO of JF Capital Advisors, said he expects to see more consolidation among boutique and lifestyle hotels for those same reasons and because the size of larger companies can let boutique hotels focus on what they’re good at instead of some of the nuts and bolts of running a hotel business.
“Rather than cannibalize or put resources where they don’t belong, they can do something truly independent,” Falik said. “There are a lot of fixed costs in things like revenue management or social media management. And they can save money by tying into a larger company on things like insurance coverage.”
Schrager said the benefits of consolidation aren’t exclusively enjoyed on the boutique side of the equation. He cited his work with Marriott’s Edition collection as an example of how the culture of boutique hotels can improve the experience across brands for a larger company.
“The mergers that work are the ones where they find out how to take the best from the company they’re acquiring and combine that with what their company can add to it,” he said.
What’s next
Several sources said they expect consolidation to continue in this portion of the industry. Conley said he believes the push can leave two types of boutique hotel companies—those attached to larger companies and small, likely regional players.
“There’s a point of view that you can either be really, really small and profitable or be big, but you don’t want to be sort of in the middle of the road,” Conley said. “You can say a midsize boutique hotel company is always stretching and having to spend money on infrastructure.
“If you stay small, you can spend your money on just a few projects, or if you’re big you can leverage that,” he added. “But if you’re midlevel you always have to risk not having that infrastructure or invest in it and constantly let it limit your profits.”
Schrager said he disagrees that there will be specific sizes where boutique hotel companies can thrive, but he said more companies will be adopting the boutique/lifestyle way of thinking based on guests’ desires. He said the key going forward will be finding ways to couple that while providing value, which could drive further consolidation.
“Good value and appropriate pricing will become more and more important for everybody, including those who are rich and those who aren’t rich,” he said. “Nobody wants to get ripped off.”
Depatie said hoteliers will need to balance size with uniqueness as consolidation continues.
“Scale can potentially work against you,” he said. “When you try to make individual properties, as you get bigger it gets more tempting to do the same thing you’ve done before. Then you become less innovative as you need to grow faster.”
Even with greater consolidation, though, Conley said boutique hotels will always be a space for innovation within the greater hotel industry.
“Boutique hotels are still a real estate business, and that’s always localized,” he said. “There will always be a market for a few new, typically young innovators who want to create a hotel company. That will really give people the ability to constantly have fresh blood come into the hotel market, and that’s good news.”
Source: hotelnewsnow.com 