By Marcela Ayres
SAO PAULO (Reuters) - Mergers and acquisitions in Brazil's thriving hotel industry are increasing ahead of soccer's World Cup and the Olympics, as smaller players struggle to survive and leisure travel surges among the nation's thriving middle class.
Local and foreign hotel and resort chains view consolidation as a means to cut costs and improve processes across the sector, as well as garner partners with know-how. That said, industry players agree on one point: that room for smaller players is rapidly decreasing.
Brazil's hotel market is underpenetrated, with few global chains operating throughout the country, Latin America's largest and most populous. Currently, outdated family-run hotels are spread throughout the country - most of them with limited ability to grow beyond where they are headquartered, according to Richard Cathart, an analyst with Espírito Santo Investment Bank.
Local private hotel operators plan to spend 7 billion reais ($3 billion) on expansion through 2015, according to industry group FOHB. The planned spending reflects the industry's resilience in the face of a slowdown in household consumption and high expectations for Brazil's hosting of the 2014 World Cup and the 2016 Olympics, industry leaders said.
BHG Brazil Hospitality Group SA (BHGR3.SA), Brazil's No. 3 hotel chain, raised about 355 million reais ($160 million) in a March share offering, of which 80 percent will be used to buy rivals. Portugal's Grupo Pestana is selling a hotel in Rio de Janeiro to raise capital, while Hemisfério Sul Investimentos and WTorre Hoteis Holdings are tapping their cash holdings to grow in mid-sized cities.
"Our investment case is that consolidation and professionalization will drive the sector going forward," BHG Chief Executive Eduardo Bartolomeu said in an interview. "Clients will want good service and a brand in which they can trust."
Fresh capital should help BHG, Brazil's only listed hotel company, to outdo rivals regardless of Brazil's three years of sub-par economic and consumption growth, as about 70 percent of revenue at BHG comes from business travelers. The company wants to increase the number of available suites by 50 percent at the end of 2015 from the current 8,539.
Pestana's Rio de Janeiro hotel sale will help the company raise funds to grow elsewhere in the country and in other countries, said Pedro Reimão, Pestana's Brazil country head. The company wants to include in the transaction an option to repurchase the facilities, Reimão added.
Other players are looking to outsourcing and partnerships to grow. In the case of HotelPar, the chain developed two low-income brands and outsourced management of its hotels to Wyndham Hotels (WYN) to focus on expansion. WTorre and Hemisfério Sul launched a joint venture to expand in hotels where guests are unwilling to pay more than $100 a night for a room.
The venture is unlikely to raise funds in the capital markets for its expansion plans, said Maximo Pinheiro Lima, a founding partner at private equity firm Hemisfério. "In the long run, I manage to keep an above-market quality standard because I depend on my own brand," he added.
A key element of Brazil's hotel sector expansion is the increase in domestic demand for travel and hotels, rather than the rise in the number of foreign visitors to the country. Arrivals at Brazil's airports increased by a compound average rate of about 11 percent between 2007 and 2012, with domestic arrivals showing 14 percent growth.
According to data by real estate consultancy firm Jones Lang LaSalle, the number of hotels rated above two-stars with online booking services is expected to rise more than 70 percent over the next decade. By the end of last year, Brazil had 313,833 hotel rooms registered, according by tourism ministry data.
(Editing by Guillermo Parra-Bernal and Steve Orlofsky)