In an announcement that will effect the latest hotel being built by DART on Grand Cayman's Seven Mile Beach, United Kingdom hotel chain InterContinental Hotels Group has has agreed to acquire United States-based boutique hotel specialist Kimpton Hotels & Restaurants for $430 million in cash and a short-term debt facility.
Talking to Hotel News Now, Richard Solomons, IHG’s CEO, said the deal would close in early 2015 and is “bang in line with our strategy of using surplus capital at this point in the market and when the right acquisition comes along.”
“It is a perfect fit, in which the market is strong and we are strong,” Solomons said, who dismissed recent shareholder activism requesting that IHG be sold as “a little bit of noise.”
The $430-million price tag “was not cheap,” he said, “but quality never is.”
“Kimpton’s portfolio has been developed in some of U.S.’s highest (revenue-per-available-room markets), where RevPAR is $180-plus, with 80% occupancy, which will make Kimpton IHG’s highest RevPAR brand, higher than InterContinental*,” Solomons said earlier during a webcast announcing the deal.
“It also helps us to fill white space in the upper-upscale segment at the top end of our portfolio,” he added.
“The deal, I believe, makes a lot of sense to owners. Our goal is to create win-win situations, and this is one,” Solomons told HNN.
Running San Francisco-based Kimpton will be current COO Mike DeFrino, while CEO Michael Depatie, according to Solomons, will be one of four existing Kimpton executives to run the Kimpton Real Estate Investment Fund.
The fund owns 30% of the existing portfolio and five of its pipeline properties. Further proceeds will be used to make future investments in Kimpton-branded hotels, according to IHG’s director of global corporate communications Zoë Bird.
“Mike DeFrino has been at Kimpton for 20 years and effectively runs it, while Depatie has increasingly been involved in the fund, so it makes sense going forward to organize it in that way,” Solomons said, adding that Oliver Bonke, IHG America’s chief commercial officer, who came to IHG in September 2013, would work closely with DeFrino to protect the Kimpton brand and to help bring IHG power to bear.
As to how the new, enlarged hotel company infrastructure will change—whether, for example, Indigo and wellness-focused Even will sit beneath Kimpton and whether any platforms will be transferred from IHG’s American base in Atlanta to San Francisco—Solomons said it is too early to say.
“It’s something we will work on. We will think about it all as a bigger business, as it now is bigger, and as there is a lot of commonality,” he said.
Not small anymore
Kimpton, established in 1981, has 62 hotels, all under management contracts and comprising approximately 11,300 rooms in 28 cities; a pipeline of 16 properties with approximately 3,000 rooms and constituting 27% of the overall portfolio; 1.6 million loyalty members; and 71 hotel restaurants and bars.
IHG franchises, leases, manages or owns more than 4,700 hotels and 697,000 rooms in nearly 100 countries, with almost 1,200 hotels in its development pipeline. The chain’s IHG Rewards Club comprises more than 82 million members worldwide.
IHG’s Indigo brand and Kimpton now possess a combined portfolio of 197 properties open or in the pipeline.
During the webcast, Solomons said Kimpton was one of the few hotel companies IHG had considered for acquisition.
“Kimpton saw that it needed a scale player to take it to its next phase of growth, and its new scale will provide immediate benefits for owners and earnings-enhancement in the first year,” Solomons said.
Paul Edgecliffe-Johnson, IHG’s CFO, also speaking on the webcast but from London, added that Kimpton executives did run a process through its owners when IHG was first in discussion with it, but they realized they needed help if they wanted to go global.
All of Kimpton’s hotels and restaurants are in the U.S., and its food-and-beverage component is of particular interest, with Kimpton considered a leader in the hotel-restaurant business.
Solomons said Kimpton’s F&B would be leveraged across the IHG portfolio.
Kimpton would see more international growth under IHG ownership, but there would be more in the U.S., too, Solomons said. In Kimpton’s current pipeline is one property in the Cayman Islands that Solomons said is not due to open until late 2016 or early 2017.
Solomons said he wants Kimpton to expand carefully, knowing the brand genuinely provided something special for the marketplace. IHG values what Kimpton has and had done, he told HNN, and executives will work to protect Kimpton’s brand integrity.
A behemoth such as IHG taking over a relative minnow such as Kimpton was more about understanding the value of that brand, not about its size, he said. Owners would understand that IHG knew why they had bought into Kimpton and what they liked about it, Solomons added.
“We genuinely respect (Kimpton) and share similar culture and values. That might sound a bit soft, but it’s true and about driving returns for owners. It’s an interesting conundrum, but we know a lot of the owners already. Their business will evolve because of IHG’s part but also because the world is changing,” Solomons added.
That growth could occur in Europe and Asia, Solomons hinted.
“(Kimpton) would work very well there. We know that the demand is there,” he said.
Financials
IHG stated that the merger would almost double Kimpton’s earnings before interest, tax, depreciation and amortization to $39 million for year 2017, achieve returns above IHG’s cost of capital by the third year after closing and that for U.S. tax purposes, the transaction, constituting an asset sale for both vendor and purchaser, will result in a reduced tax bill of $160 million.
Solomons also said the boutique company’s existing pipeline had not been built into its EBITDA predictions.
In response to a question from analyst Tim Ramskill from Credit Suisse during the webcast, Solomons said his EBITDA projections derived from future pipeline, strong growth and back-of-house synergies.
“There also is the ability to lower online-travel-agency sales, but that was not the principal part of the deal,” he said.
“The Kimpton funds have generally developed properties and then sold them off, but they have lost only a couple of properties from the platform in its entire history,” Solomons added.
Solomons also said Kimpton’s management contract model would likely stay, and while IHG would look at franchising, it was something that would not be looked at urgently. IHG’s last calculation that capital expenditure would be approximately $350 million a year also would not change due to this news.
