Empire Builders

Meetings & Conventions: Empire Builders January 1998 Current Issue
January 1998
Empire Builders

As the hotel consolidation game heats up, will meeting planners pay the price?

BY DANA NIGRO

In the past year's headliner fights, the battle between Hilton Hotels and ITT Corporation (along with its late-entry tag-team partner Starwood Lodging) ranked right up there with "Tyson vs. Holyfield." It was a bout between giants to determine who will be left standing in a field that many industry experts predict will contain only a half-dozen major hotel companies by the next century.

But the acquisition of ITT's hotel holdings was merely the highest-profile deal among a flurry of consolidation activity in the past two years. According to Coopers & Lybrand, 1997 topped 1996 as a record year for lodging industry mergers and acquisitions, with a total of 11 deals valued at $4.52 billion through the third quarter. With another nine announced deals still in the works, the total could be as high as $19.48 billion. Among the big names involved were Marriott and Renaissance, Patriot American and Wyndham, Starwood and Westin, and Doubletree and Promus Hotels.

What's driving all this consolidation? Wall Street money, mostly. "The industry is performing well and it's a good business to be in right now, so people want to invest," says Robert Mandelbaum, Atlanta-based director of research for PKF Consulting. Record occupancies and room rates have helped to attract both the more traditional private sources of capital and newer, public capital.

But Wall Street is a demanding taskmaster -- it likes growth companies. "And the quick way to grow a company is to go out and buy smaller ones," says Mandelbaum. By buying existing properties instead of building new hotels, a public company gets an instant increase in revenues and thereby looks more appealing to investors.

Mergers and acquisitions can also provide quick entry into new geographical regions and new market segments. For example, Marriott's purchase of Renaissance brought the chain into Asia's upscale lodging market. In fact, many companies are trying to become more like Marriott, with numerous brands serving specific niches, all under one umbrella.

Other companies are relying on acquisitions to expand into related markets. (Hilton was after ITT largely because it wanted the Caesars casinos.)

And, of course, combined companies create "economic efficiencies" -- another Wall Street buzz-phrase. By pooling their resources, hotel chains can trim staff, boost purchasing power, and improve their marketing efforts through combined customer databases and reservations systems.

That's great for the hotels. But with all the CEOs' talk during these mergers about "creating shareholder value," one begins to wonder if some of these corporate executives have forgotten about the end user: the customer.

What will be the fallout of all this consolidation for the meetings industry? M&C asked consultants, meeting planners and top hotel executives for their predictions.

CHAIN LINKS Following are major holdings of hotel chains that have made recent acquisitions. Carlson Hospitality
Regent, Radisson, Country Inns & Suites

Hilton
Hilton Hotels & Resorts, Conrad International, Hilton Garden Inns, Bally's

Marriott
Marriott Hotels, Resorts & Suites; Ritz-Carlton; Renaissance; New World; Ramada International (outside U.S.); Courtyard by Marriott; Residence Inns; Fairfield Inn/Fairfield Suites; TownePlace Suites; Executive Residences

Patriot American
Wyndham Hotels & Resorts, Wyndham Garden Inns, Grand Heritage, Carefree Resorts, Grand Bay, Registry

Promus Hotels Corporation
Doubletree Hotels, Doubletree Guest Suites, Club Hotels by Doubletree, Red Lion, Embassy Suites, Homewood Suites, Hampton Inn, Hampton Inn & Suites

Starwood Lodging
Westin, Sheraton, the Luxury Collection, CIGA, Four Points, Caesars (all pending close of acquisition at press time)
* D.N.

CONSULTANTS SAY...
With decision-makers controlling pricing over a greater number of hotels, expect some upward pressure on pricing, predicts Bjorn Hanson, chairman of Coopers & Lybrand's lodging and gaming group in New York City. Hotel companies are being bought for high prices, he adds, and earnings need to justify those high prices -- another factor pointing to price increases.

The fact that so many hotel chains are now public companies may keep room rates high as well, says PKF's Mandelbaum. "[Public companies] tend to be sensitive to shareholder value and revenue per share and profits per share. It's incumbent on them to really make the companies look profitable." As a result, they might not be as ready as independents to discount room rates, and they might be stricter about enforcing contracts and policies.

But having large public companies committed to hotel ownership can be a benefit, too. "They are sensitive to the fact that hotels need a capital infusion every four or five years to refurbish. The quality of the hotels and the service levels will be maintained," says Mandelbaum.

PLANNERS SAY...
In the current sellers' market, it's hard to tell what is an effect of consolidation and what is simply a natural part of the hotel industry's economic cycle. So far, while planners find it harder to get space and negotiate rates, they haven't faced many difficulties they can directly attribute to the burgeoning size of hotel chains. But that doesn't mean they aren't concerned.

The obvious worry is that consolidation will mean less competition and therefore less negotiating power. "It's scary," says Debbie Hafer, CMP, meetings director at the National Association of Home Builders in Washington, D.C. One of Hafer's concerns is that some major chains have stricter policies than others on matters such as attrition. And if one of those chains were to take over a competitor, she might have trouble negotiating a favorable contract.

"A concern I have from a third-party standpoint is, are the hotels going to go the same route as the airlines with commissions?" wonders Michael Hudson, president of Site Search & Select in New York City. "We work on commission only....Sometimes, the larger national chains aren't as willing to pay commission."

Hotel name changes can pose challenges, too, points out Katherine Christensen, CMP, an independent planner in Phoenix. "It can severely impact the meeting when the name changes after your printed promotional materials have already gone out."

Contract debates also may ensue. Jan Stieger booked a meeting at a hotel that subsequently changed hands. The new owners "were not honoring all the terms of our outstanding contracts," says the director of conference planning and education for the California Pharmacists Association, based in Sacramento. A long battle followed. Now, Stieger believes planners should include clauses that allow them to cancel contracts if ownership changes (see "Good Clauses").

Mergers, acquisitions and resulting rebrandings might lead to inconsistency among properties in a chain, worries Melissa Hollander, director of meetings and conferences for New York City-based Executive Enterprises. "You used to be able to count on a certain chain; now it's not as clear."

And some fear many of their valuable sales contacts will lose their jobs. However, points out Hollander, those who outlast a merger "can help you with a larger spread of hotels."

Having more properties under one umbrella "gives you more opportunities to deal through the same chain," adds Nancy Church, CMP, president, The Conference Company, Inc., in Boylston, Mass. "They know you, they know the business you represent. That helps my clients get a little better deal sometimes."

HOTELIERS SAY...
Some of the consolidation has been driven by the demands of the customers themselves, points out Mack Koonce, executive vice president of Wyndham Hotels & Resorts. As companies consolidate their travel and meetings departments, they find it more efficient to deal with fewer people who can handle a larger amount of their business. Once Wyndham and Patriot American complete their merger, he says, "We'll have salespeople who will be able to represent a broader set of products and brands to one planner."

This also gives the customers a little more negotiating leverage. "By having a customer relationship across 200 hotels instead of 30 hotels, you'll know more about not only the history of the individual group but that parent company's total pattern," says Koonce. Instead of talking to a hotel solely about a particular 200-room-night event, a planner can also remind his sales contact that the company uses 20,000 room nights a year.

Paul Novak, Patriot American's executive vice president of acquisitions and development, feels that customers should benefit economically "because of the synergisms of larger hotel companies versus smaller, piecemeal companies." He adds, "[Consolidation] should give those companies better buying power and their reservation systems should get stronger."

Plus, with pooled resources, hotels may be better able to handle the expensive task of keeping up with changing technology -- an area in which they have typically under-invested, hotel sources admit.

Rampant rate hikes are unlikely, says Roger Conner, Marriott International's vice president of lodging communications. "Pricing will be a reflection of the remaining competition in the industry, economic conditions and the market you are going to. The customer will continue to have enough impact on how we price."

Market forces will regulate brand consistency, too, says Koonce. "There is that concern that some companies don't have tight standards and will take anything in order to grow. If you are a public company, the pressure is strong. But if you shoot yourself in the foot and don't have consistent quality, then the customer doesn't do business with you."

PUBLIC PLAYERS: WHO'S WHO?
STARWOOD LODGING
Having successfully taken on Hilton in a battle for ITT, chairman and CEO Barry Sternlicht's name has been splashed all over the news in the past few months. The 36-year-old head of the nation's largest hotel real estate investment trust (REIT) also engineered the purchase of Westin (owned half by his own Starwood Capital Group). Assuming both deals go ahead as planned, Starwood Lodging will have more than 650 hotels in 70 countries and $10 billion in revenues.

What will Starwood do with two powerhouse brands? In a press conference following the ITT shareholder meeting, Sternlicht said he plans to expand both Westin and Sheraton. Under the terms of the Westin deal, Starwood Lodging Corporation (the operating side of the paired-share REIT) will change its name to Westin Hotels & Resorts Worldwide. Its CEO will be Juergen Bartels, who has led Westin on an aggressive expansion rate of two new properties per month. Of Starwood's existing hotels, 20 will be converted to Westins.

With ITT's chairman and CEO, Rand Araskog, stepping down, it would seem that Sheraton might be playing second fiddle. But Sternlicht has said that 80 of Starwood's other hotels could be branded as Sheratons. And he calls Sheraton's mid-price Four Points brand "a great growth vehicle for us internationally, particularly in Asia." Sternlicht also would like to have a five-star brand, which could be accomplished with a repositioning of ITT's Luxury Collection to make it more distinct. Sternlicht ended his press conference with the broad hint that Starwood would be buying something else soon.

HILTON HOTELS CORPORATION
Now that he's lost his chance to build the world's largest hotel company by taking over ITT Sheraton and Caesars, is CEO Stephen Bollenbach giving up on Hilton's growth plans? Not likely -- he'll just change strategies.

For now, the company will buy full-service hotels one by one. "There are really no large hotel companies that own the kinds of hotels we want," said Bollenbach at a press conference following the ITT stockholders' meeting. "We really want to own real estate; we don't want to pay a lot for a brand name because we already have a brand."

Bollenbach still wants Hilton to be a leader in consolidation of the gaming industry, but denied a report in BusinessWeek that the chain is looking at MGM Grand Casinos.

Even without the ITT feather in its cap, Hilton had a busy year. With the integration of Bally Entertainment Group into its system, Hilton became the world's largest gaming company. Its alliance with Ladbroke Group PLC, owner of the Hilton name outside the United States, began to bear fruit. The two companies integrated their sales offices and marketing efforts, expanded the HHonors loyalty program worldwide and began building a new joint central reservations system. And the new mid-market Hilton Garden Inns brand had 50 properties open or under contract by the end of 1997.

MARRIOTT INTERNATIONAL
When it comes to the big deals of the next few years, it's almost certain Marriott will be somewhere in the picture. "We are a consolidator and plan to continue to be," says Roger Conner, the chain's vice president of lodging communications. Recently, Marriott announced plans to merge its food services and facilities management division with a European company. The new Marriott International spin-off will be more focused on its lodging business than ever. Even more importantly, it will shed the vast majority of its debt -- and can therefore take a large amount back on for purchases.

The company's stated goal is to have 2,000 properties by 2000. By early this year, Marriott should have hit the 1,500 mark. The purchase of the Renaissance Hotel Group in March 1997 gave the chain 150 additional properties across three brands -- Renaissance, New World and Ramada International -- as well as an alliance with the previous owner for future development. But the deal was really important in that it roughly doubled Marriott's presence outside the United States, from representation in 30 countries to more than 50, says Conner.

For now, Marriott is focusing on expanding through construction and conversion. With 10 hotel brands covering nearly every possible market segment (from Ritz-Carlton luxury to extended-stay and limited service), buying another chain with a well-known brand hardly seems necessary. However, with the Renaissance purchase, Marriott has already proven that it is willing to operate more than one brand in a segment. And, says Conner, "The 'one here, one there' conversions would not really represent the kind of pace that one is usually talking about when talking about consolidation."

PRIVACY, PLEASE
Private ownership has its benefits, many hoteliers contend. "I'm able to focus on issues related to service as opposed to worrying about stock price," says Brian Stage, president of Radisson Hospitality Worldwide, part of the privately owned Carlson Companies. "We have the same impetus to grow, but we have the opportunity to be more patient and take a longer-term view of our future. We don't have a quarterly report to make."

Radisson continues to add hotels through acquisitions in key markets, franchising, licensing and strategic alliances. "There are a lot of companies out there that are tapping significant investment pools to acquire hotel real estate and have no interest in being a brand, but still need an affiliation with a strong brand," says Stage. "That's an important source of new business for us."

At the 43-property Omni Hotels chain, "Everyone and his brother has been to our doorstep offering huge sums of money if we would sell," says president Jim Caldwell. But Omni plans to grow into a global company through franchises, management agreements and acquisitions. "We are actively in discussions with a number of other companies that own portfolios of hotels," according to Caldwell. "We have the financial ability to go out and do extremely large transactions if we find the right one." Omni is primarily looking at companies in Mexico, Latin America, Europe and the Pacific Rim. The company also has several North American construction and conversion projects in the works.

Caldwell adds a few words of caution for his public counterparts: "I think a number of our competitors are not focusing on the guest as much as they will have to when the industry goes through another one of its cycles." * D.N.

PATRIOT AMERICAN/WYNDHAM
In terms of rapid numbers of deals, Patriot American Hospitality was at the top of the heap last year. In 1996, most planners had never even heard of the second-largest hotel REIT, which owns hotels under many different flags. Then the company switched strategies, and it now has five proprietary brands.

"What this allows us to do is to be able to provide different levels of product, much like Marriott has done," says Paul Novak, executive vice president of acquisitions and development.

The April acquisition of Wyndham Hotels & Resorts was Patriot's biggest deal in 1997; the REIT's paired operating company will be renamed Wyndham International. Wyndham turned to Patriot because it could provide the capital needed to grow to more than 200 properties.

Since the merger was announced (the deal had not closed as of press time), Wyndham bought the 17-property ClubHouse Hotels chain and, in one month, Patriot acquired Carnival Hotels & Resorts (including the Registry and Grand Bay brands), Gencom American Hospitality (numerous third-party management contracts) and WHG Resorts & Casinos (three resorts in Puerto Rico). Last month, Patriot announced a $2.1 billion acquisition of Interstate Hotels, which owns, manages or leases 222 hotels. The deal, which should close in the next two months, will give Patriot a grand total of 455 properties. Earlier, Patriot had purchased Carefree Resorts and Grand Heritage Hotels.

Many of the new acquisitions will be converted to Wyndhams, historic properties will take on the new hybrid Wyndham Grand Heritage Hotels and a few luxury resorts may assume the Carefree name. Patriot also has plans to grow the luxury Grand Bay brand.

PROMUS HOTELS CORPORATION
Having lost Renaissance to Marriott, Doubletree Hotels found a willing merger partner in the operator and franchisor of the Embassy Suites, Homewood Suites, Hampton Inn and Hampton Inn & Suites brands. Doubletree had already been rapidly adding management contracts, and its 1996 acquisition of Red Lion Hotels gave it an instant presence on the West Coast. But the new deal creates a company that, as of last June, has 1,132 hotels, covering the upscale, upscale suites, extended-stay and mid-price markets.

The two companies are merging into subsidiaries of Memphis-based Promus Hotel Corporation. Doubletree brings its upscale full-service Doubletree and Doubletree Guest Suites, and mid-price Club Hotels by Doubletree to the mix. "Our ability to cross-sell and cross-market our brands will be a key driver of our future growth," says Raymond Schultz, president and CEO of Promus. *

GOOD CLAUSES
If the hotel you contracted with this week has a new name -- and new policies -- next week, where does that leave your meeting?

At the time of booking, ask yourself: If the property changes hands, do you want to be able to get out of the contract, or do you want to make sure the hotel can't get out of it?

"We suggest that you include a clause that allows you to cancel your contract if there is a change in the flag, management or ownership of the hotel," says Jonathan Howe, Esq., of Howe & Hutton, Ltd., based in Chicago and Washington, D.C.

He points to cases where a property's high-cachet name was switched to another brand that wasn't perceived as having the same quality.

However, "if [the planners] want the hotel regardless of whose name is on it, then they should include a clause that says that the current owners will assign their duties under the contract to the new owners," suggests John Foster, an Atlanta-based attorney specializing in the meetings industry.

In general, where neither clause is added, existing contracts are assigned to the new owner. * D.N.