Marcato Capital goes activist on InterContinental Hotels Group (Part 5 of 6)
1Q14 RevPAR growth
InterContinental Hotels Group (IHG), the UK-based hotels group, has seen an activist push from Mick McGuire’s Marcato Capital Management. The San Francisco-based hedge fund is pressuring the hotels company to explore strategic alternatives, including a sale to a U.S. based hotels group. Marcato said it has hired Houlihan Lokey to conduct a strategic review of the company to explore ways to improve shareholder value.
IHG, which is Europe’s second-largest listed hotel operator, recently reported its first half results. The company said its reported operating profit fell 8% to $310 million from $338 million a year earlier, but the figure came above street estimates. The decline was due to one-off expenses from the New York Barclay and San Francisco hotel sales. Its underlying profit was up 6% in the first half of the year. Revenue fell 3% year-over-year (or YoY) to $908 million while Fee Revenue, which is group revenue excluding owned and leased hotels, managed leases and significant liquidated damages, was up 6% to $600 million.
Americas drives growth in RevPAR
A key industry metric revenue per available room (or RevPAR) grew 5.8% globally and 6.7% in the Americas. RevPAR was up 6.6% in the first half and 6.7% in the second quarter for the U.S., where an increase in the business and leisure travel is driving growth for the hospitality and travel industry. Around two-thirds of IHG’s operating profit is generated by the Americas segment. However, reported revenue decreased 5% to $435 million and reported operating profit fell 5% to $268 million for Americas. IHG said underlying owned and leased hotel profits increased 80%, driven by 6.7% RevPAR growth at InterContinental Boston, and 30.5% RevPAR growth at Holiday Inn Aruba, which is benefiting from its recent refurbishment.
European RevPAR growth increase fueled by UK
Comparable RevPAR in Europe increased 4.9%, with second quarter RevPAR up 4.1%, mainly driven by the UK, which saw RevPAR up 8.7%, with high single digit growth in both London and the provinces, followed by Germany where RevPAR increased 3.1%. IHG said it saw “good” operating profit growth in the managed and franchised business driven by mid-single digit RevPAR growth, offset by a $7 million operating profit decline at its only remaining owned hotel in this region—InterContinental Paris – Le Grand. The company recently said it has received a binding offer from Constellation Hotels Holding Ltd. to acquire InterContinental Paris – Le Grand for a proposed purchase price of $442 million.
IHG sees impact from political unrest in parts of AMEA
Asia, Middle East, and Africa (or AMEA) comparable RevPAR increased 3.7% driven primarily by rate growth, with second quarter RevPAR up 3.6%. Excluding Thailand and Egypt where there was ongoing political unrest, first half RevPAR increased 5.4%. Performance was led by Japan up 8.8% and South East Asia which, excluding Thailand, was up 7.2%. IHG said Australia and the Middle East continue to perform solidly with RevPAR growth of 6% and 4.1%, respectively. The company said the continuing political unrest in Thailand is expected to have a $2 million impact on managed operating profit in the second half of the year.
Greater growth in China driven by managed business
For China, comparable RevPAR increased 4.3% driven by occupancy growth, with second quarter RevPAR up 4.6%. IHG said it outperformed the industry, which continues to experience a number of challenges including slower macro-economic conditions and austerity measures. It said its “industry outperformance reflects the strength of IHG’s brands in the region and the leading position we have built up over 30 years of operating in the Chinese market.” It said it saw growth in the managed business, where 16% net rooms growth drove strong incremental fees despite the total RevPAR declines.
IHG’s said its “growth strategy is focused on the largest or fastest growing markets in which the company has strong existing brand presence or an opportunity to build a brand presence, where our scale and revenue delivery systems confer the greatest benefits and markets which are aligned to our asset-light business model.” Many of its peers such as Wyndham (WYN), Starwood (HOT), Marriott (MAR), and Hyatt Hotels (H) are pursuing a similar asset light strategy.
Browse this series on Market Realist:
- Part 1 - Why Marcato hires adviser for InterContinental strategic review
- Part 2 - InterContinental Hotels could explore sale to a US hotel operator
- Part 3 - Why InterContinental Hotels’ “asset-light” strategy drives growth
- Company Earnings
- Investment & Company Information
- InterContinental Hotels Group