Marcato Capital goes activist on InterContinental Hotels Group (Part 2 of 6)
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 hotel company to explore strategic alternatives, including a sale to a U.S. based hotels group. The fund added in a statement back in May that “we believe that a combination with a larger hotel operator would have compelling strategic and financial merit and represents a unique opportunity to reshape the global hospitality industry.”
News reports have speculated that IHG could be an attractive candidate for a U.S. company seeking tax benefits through an inversion deal. Under the so-called “tax inversion” deal, a U.S. company can benefit from lower taxes by acquiring a foreign entity and shifting its domicile overseas. Canada, Ireland, Switzerland, and the UK have been considered popular destinations for such deals. The U.S. has a higher corporate tax rate of 35%, compared to 21% in the UK, where the corporate tax rate will decline to 20% in 2015. However, a U.S. company seeking foreign domicile can only own 80% of shares in the foreign company, with the latter’s shareholders required to own the remaining 20% of the company.
Treasury Department exploring ways to limit tax inversions
President Obama recently termed these inversion deals as an “unpatriotic tax loophole,” and reports said the U.S. Treasury Department is exploring ways to limit the strategy. The U.S. Treasury has estimated that curbing such deals would generate $17 billion in tax revenue over the next ten years. Walgreen’s Co. (or WAG) shares tumbled recently after the drugstore chain backed out of an inversion deal. Other companies such as Minnesota-based Medtronic (or MDT) and Illinois-based drug maker AbbVie (or ABBV) are also involved in tax inversion deals through the acquisition of Ireland-based smaller peers Covidien (or COV) and Shire (or SHPG), respectively. Thomson Reuters said that tax inversions represented 66% of proposed U.S. cross-border deals this year.
IHG, which owns brands such as Crowne Plaza and Holiday Inn, is known to have turned down a $10 billion takeover approach earlier in May. The bidders were rumored to be Wyndham Worldwide (WYN) and Starwood Hotels (HOT). The company refused to comment on speculation over takeover approaches on its recent earnings call. IHG Chief Executive Richard Solomons was recently cited as saying that “We’re a public company with a very experienced board and chairman, and if there was an approach that was value creating for shareholders of course we would look at it.”
Both Wyndham and Starwood are part of the iShares U.S. Consumer Services ETF (or IYC) and the Consumer Discretionary Select Sector SPDR Fund (XLY). InterContinental Hotels Group, Wyndham, and Starwood are members of the iShares S&P Global Consumer Discretionary ETF (RXI).
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