A business owner starts looking for a buyer when the company is performing well and worth a lot, or when going it alone begins to look scary.
Both of those scenarios are likely behind the decision of Carlson to consider its options for its Radisson brand and the rest of its hotel operation.
It might seem contradictory, that it’s both a great and worrisome time to be in the hotel business. But the industry has been performing particularly well lately, driving up valuations, at the same time trends could soon make it more difficult for smaller players to compete.
Taken together, the facts certainly suggest that it is wise for Carlson to at least take a look.
The Minnetonka-based company declined to discuss its thinking. What’s known about its plans comes from a report in the Wall Street Journal, based on unnamed sources, that the investment banking firm Morgan Stanley is helping to explore strategic options.
While this step is often seen as simply shopping the company among potential buyers, that’s not necessarily the case. It could mean a merger for Carlson’s hotel group that leaves the company in a principal ownership position if not in control, or no deal at all.
The current operation, which includes Carlson’s well-known Radisson brands known as Carlson Rezidor Hotel Group, is the 13th largest global hotel company, according to a ranking last summer in Hotels magazine, with almost 1,100 properties and more than 170,000 hotel rooms.
While that sounds like a lot, it isn’t compared with the companies at the top of the ranking, Hilton Worldwide and Marriott International, both at closer to 750,000 rooms. Marriott has since agreed to buy Starwood Hotels & Resorts Worldwide Inc. for more than $12 billion, an acquisition that will put it atop next year’s ranking at well more than a million rooms.
As a basic rule of thumb in business, once consolidation starts taking place over your head, with a combination of competitors who are already bigger than you are, you have a long-term strategic problem. It’s likely that this big Marriott deal sparked discussions all over the industry about whether the time is right to find merger partners.
There are plenty of reasons why mergers fail to realize the goals of the dealmakers, but in this business there is a clear case to be made for consolidation.
The biggest hotel companies don’t own and operate a lot of hotels, instead having largely turned to licensing and franchising. One of the things the hotel companies do is steer paying guests to the properties owned by real estate investment trusts and other investors.
One reason to link arms with competitors is to get big enough to negotiate better revenue splits with organizations known as online travel agents, or OTAs. These are the likes of Expedia and Priceline’s Booking.com, competitors in a market that has itself been consolidating into fewer, more formidable players.
In addition to driving a more favorable split with the online travel agents, companies also hope to work around OTAs and grab more customers directly. One of the ways they do that is by enrolling guests in loyalty programs, creating an incentive to book additional rooms in a system where points could be earned or some free perks could be enjoyed.
Once Marriott completes its merger with Starwood and brings aboard its Starwood Preferred Guests, it will have about 75 million loyalty program members, a powerful and enduring competitive advantage.
“The competitive threats in the industry are becoming greater and more apparent,” said Michael Bellisario, an analyst with Robert W. Baird & Co. in Milwaukee. “That’s Airbnb, that’s OTA consolidation, that’s pricing transparency. By merging … and putting more dots on a map, Marriott can create its own platform that can drive more business from its loyal customers to its hotels, to circumvent all of those threats.”
Getting bigger to enhance marketing clout isn’t exactly a new idea. In fact, it seems to have been one of the reasons behind forming the Carlson Rezidor Hotel Group several years ago. It’s not really a company but a marketing partnership between Carlson and Brussels-based Rezidor, a publicly held company with roots in Scandinavia.
According to Rezidor’s most recent financial filing, Carlson owns just over 51 percent of Rezidor’s outstanding shares. Operating profit before noncash expenses for Rezidor’s most recently reported nine-month period jumped more than 20 percent compared to the same period in 2014.
That certainly has to be encouraging to Rezidor’s big U.S. owner, but Carlson’s hotel group should be doing well. The Chicago consultant Mark Eble of PKF Consulting said he’s certain he is now seeing the financial high water mark for the industry.
Based on results through the third quarter, the real estate firm Marcus & Millichap predicted that the U.S. segment of the industry was going to roll through the final months of 2015 to set new highs in occupancy rate, average daily rental rate and the closely watched measure of both, the revenue per available room.
There’s been choppiness in the stock market of late, of course, but the solid growth in revenue did propel the prices of the big hotel company stocks over the last couple of years, up through their previous highs reached in 2007, another era with good financial results.
Eble said he had no knowledge of Carlson’s plans. But, he said, “if you own hotels or are in the business of valuing hotels, things have never been better than they are today. There is this sense … that if you are going to do some transactions, now is the time.”
“Now, you don’t act on this unless you think there’s value to be achieved,” Eble added. “But you have to consider it.”