Holiday Inn owner InterContinental Hotels (IHG) is tapping into the $60bn luxury segment with the acquisition of Six Senses, a leading operator of luxury hotels, resorts and spas.
Shares in InterContinental are up just 0.6% at £44.87 after it arguably paid a full price for Six Senses.
InterContinental paid private equity firm Pegasus Capital Advisors $300m in cash for all of Six Senses’ brands and operating companies, which do not include any real estate assets.
EXPENSIVE PRICE TAG
According to the company, the acquisition is only expected to break even on the basis of earnings before interest costs, tax, depreciation and amortisation (Ebitda) in the second year.
In other words it will take three years for the deal to generate a positive return at the Ebitda level.
Bank of America Merrill Lynch analyst Geoffrey d’Halluin says the deal is ‘strategically sensible’ as Six Senses is an iconic brand that benefits from a very strong customer proposition.
However the deal is not cheap according to d’Halluin. Six Senses is only expected to generate a return approximately equal to its cost of capital four years on from the date of acquisition.
‘Assuming a cost of capital of 7% to 8%, this suggests about $21m to $24m of Ebitda in year four or about a 13 to 14 times Ebitda acquisition multiple,’ comments the analyst.
As a general rule of thumb, a multiple of under 10 times Ebitda is seen by investors as a decent price to pay. A higher multiple may be justified if the asset has exceptional growth credentials.
Frankie & Benny’s owner Restaurant Group (RTN) recently came under fire for agreeing to pay 13.2 times EV/Ebitda for Wagamama, which you can read about here.
AMBITIOUS EXPANSION PLANS
Six Senses manages 16 hotels and resorts in popular locations including the Maldives and Thailand, with 18 management contracts in its pipeline and over 50 deals currently in ‘active discussions.’
InterContinental is keen to boost its exposure to affluent travellers and the latest deal will boost its portfolio of open and pipeline luxury hotels to 400 worldwide.
The company has ambitious plans as it wants to expand the Six Senses brand to over 60 properties globally over the next 10 years with an eye on vital urban markets.
InterContinental is already making progress as a property is under construction in West Chelsea in New York.
