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Like many hedge funds after
a rough October, Marcato
Capital Management could
do with a good run to see out the
year. Since disclosing a stake in real
estate company American Realty
Capital Properties at the end of
March, Mick McGuire’s fund has
seen the stock slip nearly 40%, while
a $5 million position in March.
Luckily, November has seen a couple
of promising developments for the
California-based fund. NCR Corp
has risen more than 15%, despite
disappointing earnings, since
Marcato disclosed a $308 million
investment, and granted McGuire a
seat on its board. A new campaign
to persuade Dillards to drop some
of its property into a real estate
investment trust also takes some of
the pressure off InterContinental in
the activist’s portfolio.
One that Marcato could really benefit
from doing well on is InterContinental
Hotel Group. If the activist’s stake,
initially 3.8% of the outstanding
shares, has remained constant since
it first commented on the situation in
late May, it will be worth £232 million
($363 million). Given that Marcato
thinks shares could be worth more
than double their current price, a
successful campaign could be better
than Thanksgiving and Christmas
rolled into one.
If that is one reason for urgency,
Marcato gives plenty more in its
latest presentation on the stock,
released on November 11. Now is
an “extremely favorable” time for
the hotel sector, it says, with strong
demand and several new markets
opening up to Western chains.
But most important to the activist’s
design is the strong headway in
cross-border M&A transactions.
With one exploratory approach for
InterContinental reported earlier
this year, Marcato has decided that
the time is ripe to put the company
in play. To that effect, Marcato has
hired PR firm Sard Verbinnen and
boutique investment bank Houlihan
Lokey, a specialist in real estate
transactions and no stranger to
the activist space, having advised
Barington Capital Group on its white
paper at Darden Restaurants.
Houlihan has narrowed the shortlist
of desirable suitors down to six
hotel chains; Wyndham, Starwood,
Hyatt, Marriott, Hilton and Accor.
Marcato says a combination with
Intercontinental Hotels Group
Industry Lodging
Sector Services
HQ Denham, UK
Market cap £ 6.21 bn*
Exchange LSE
Ticker IHG
* accurate as of 24 November, 2014
Intercontinental Hotels Group
16
Now is an extremely favorable time for the hotel
sector, Marcato says”“
“any of these strategic partners” has
the potential to add global scale,
produce revenue synergies and
long-term earnings accretion.
Several factors are likely to come
into play, with InterContinental
offering all of the six potential
partners an opportunity to lighten
their asset base, generate synergies
and expand into China. Marcato
estimates cost synergies at $150-
200 million for all potential partners,
with the exception of Hyatt, which
would likely generate synergies of
$75-125 million.
Greg Johnson, an analyst at Shore
Capital who covers the stock, says
the potential for synergies is real,
but doubts that other hotel chains
will see an acquisition as the best
way to broaden their asset base
in emerging economies, given the
significance of InterContinental’s
Holiday Inn chain within its asset mix.
Other operators “might be better off
growing organically,” he says.
Another analyst, who preferred not
to be named in this piece, said a
market-dominating loyalty rewards
scheme could overcome these
restrictions, but questioned whether
a debt-funded takeover would put
a combination in a good position
near the top of the hospitality sector
market cycle.
“Every investment bank in the
world has probably looked into
whether this deal makes sense,”
the analyst said. But concerns over
the potential costs of the merger
meant InterContinental was unlikely
to make a move itself, while it could
just as easily fund a campaign of
giveaways to shareholders with
asset sales. Indeed, a $750 million
special dividend announced in April
has already contributed to a surge in
the stock price, and will likely make
for healthy returns for Marcato.
Furthermore, the company has been
hosting a series of meetings with
investors and analysts at which it
enjoys pointing out inaccuracies in
Marcato’s presentation, although it
hasn’t gone public with the criticisms
yet.
The same analyst thinks
InterContinental is far from
vulnerable, with shareholders still
enjoying the fruits of organic growth
and the stock up nearly 23% for
the year. “This is a highly respected
management team, and other
shareholders are quite happy with
them.”
The model for the trade is Burger
King’s recent tax-inversion deal with
Canada’s Tim Horton’s – stocks held
by McGuire’s alma mater, Pershing
Square Capital Management. As
Marcato has argued, “This lauded
merger has striking similarities to the
opportunities we believe are currently
available [to InterContinental].
InterContinental, for its part, isn’t
likely to play along. In a statement,
it said that after two meetings with
“ANY OF THESE PARTNERS HAS THE POTENTIAL TO ADD SCALE AND PRODUCE SYNERGIES”
17
May 29, 2014
Marcato reveals a 3.8% stake in InterContinental, and urges the company to sell itself, after the company reportedly rejected an unsolicited bid.
August 4, 2014
Marcato reveals it has retained the services of Houlihan Lokey to find a buyer for InterContinental Hotels Group.
November 11, 2014
Marcato releases Shareholder Letter and Presentation repeating its request for IHG to sell itself.
August 6, 2014
Intercontinental’s CEO Richard Solomons reveals that he has recently met with Marcato, however his focus remains on improving the company’s financials rather than a sale.
November 25, 2014
The CEO of Accor, a French hotel chain, hints that a partnership with Intercontinental is not part of his strategy.
June 6, 2014
InterContinental reveals that it is to pay shareholders a special dividend of $2.93 (£1.74) per share.
Marcato’s campaign Intercontinental Hotels Group: a timeline
This is a highly respected management
team, and other shareholders are quite happy with them”“
Marcato in September and October,
it said it intended “to continue
to pursue its current strategy for
high quality growth and delivering
strong operational and financial
performance.”
For its next steps, much will depend
on whether Marcato can convince
one of its magnificent six to bid
for InterContinental. To date, there
hasn’t been a formal bid, despite the
interest expressed in March.
And with the Euro continuing to
weaken against the Dollar, it might
be asset-heavy Accor that finds
itself having to entertain suitors.
The French chain is performing well
under relatively new CEO Sebastian
Bazin, but if a sale could be financed
with an immediately sale-leaseback
of some of its real estate, it could
prove more attractive than a debt-
laden InterContinental.
InterContinental’s London listing
provides options—if Marcato
increases its stake or joins with
other actors to create a holding of
more than 5%, it can requisition a
meeting—but takeover efforts on
two fronts are frowned upon in the
City, with its restrictive takeover
code. That means that if a bid does
emerge and the company resists,
Marcato could find itself on the
sidelines with a tight window of
opportunity.
McGuire’s mentor, Bill Ackman, has
specialized in putting companies
into play with hostile campaigns.
One proxy solicitor, who preferred
not to be named, said of Marcato’s
campaign “This was a planting of
their flag... If they don’t get more
widespread support they will put at
least one candidate up for the board
at the next meeting.”
IHG Snapshot
52 week high 2648 p *
52 week low 1999 p *
Share price 2626 p *
P/Sales 25.38 **
* accurate as of 24 Nov, 2014** trailing 12 months, accurate as of 30 Jun, 2014
Source: Capital IQ
Hospitality for investors, but no rest
“MCGUIRE’S MENTOR, BILL ACKMAN, HAS SPECIALIZED IN PUTTING COMPANIES INTO PLAY”
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01 April 2014 01 October 2014
Volume Closing share price (£)
Marcato reveals a 3.8% stake in InterContinental, and urges the company to sell itself
IHG announces intention to pay $750mn special dividend
IHG issues circular to shareholders confirming special dividend and associated share consolidation
Ex-dividend date
Marcato hires Houlihan Lokey to find a buyer for IHG
IHG CEO Richard Solomons reveals his focus remains on improving the company’s financials rather than a sale IHG receive
binding offer for Intercontinental Paris-Le Grand of €330mn from Constellation Hotels Holding Limited
Marcato reiterates demand for IHG to sell itself but the issuer maintains its outlook
Hotel Room
Count
Mkt cap
($mn)
Similar asset-
lite strategy
Potential for Chinese
market leadership
Synergies
(% G&A)
Impact on
mkt cap*
Marriott 696,926 21.2 Yes Yes 14-19 96.5%
Hilton 693,980 24.4 Yes 19-26 134.4%
Accor 470,878 10.9 Yes N/A 61.0%
Starwood 349,570 14.6 Yes Yes 20-26 81.7%
Wyndham 650,200 10.2 Yes Yes 14-18 38.3%
Hyatt 149,640 9.5 No 11-19 155.3%
Of six potential bidders identified by Marcato, Hyatt or Hilton would have the biggest
immediate impact, though Hyatt has a smaller presence in the emerging Chinese
market.
* Estimated by Marcato; includes impact of tax savings but not EPS synergies.
If they don’t get more widespread support,
they will put at least one candidate up for the board at the next meeting”
“
2800
2600
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1800
Marcato’s preferred partners for IHG