TRAVEL: Accor Checks Into China Lodging With New Alliance

Bottom line: Accor’s new tie-up with China Lodging looks like a smart deal that will bring together complementary partners, and is likely to spark a new round of similar cross-border partnerships in the year ahead.

China Lodging moves in with Accor

A development I’ve been predicting for quite a while has finally happened in China’s lucrative but crowded hotel space, with news of a major new tie-up between global giant Accor (Paris: AC) and domestic budget operator China Lodging Group (Nasdaq: HTHT), which also calls itself Huazhu. The tie-up will essentially see China Lodging take over operation of much of Accor’s China portfolio, and could ultimately see Accor purchase the Chinese company outright. The move could also spark a round of similar tie-ups that sees other major foreign operators pair up with Chinese partners like Home Inns (Nasdaq: HMIN).

This kind of consolidation is sorely needed in China’s hotel industry, which is crowded with a number of well-run domestic players alongside most of the world’s major Asian and global brands. All of those have been building hundreds of new properties over the last decade, running the range from budget to luxury properties, in a bid to profit on a new generation of upwardly mobile Chinese business and leisure travelers.

This ground-breaking deal has a number of parts, which I’ll review shortly. But the bottom line is that China Lodging will sell 10 percent of itself to Accor, which will hand over management for much of its China portfolio to its new Chinese partner. (company announcement) Calculations using China Lodging’s latest share price would value the deal at nearly $150 million, though I do expect China Lodging’s shares will jump around 10 percent when Monday trading begins in New York.

The deal has 2 main parts, the first of which will see China Lodging take over management of Accor’s budget to mid-range hotels in China, including Mercure, Ibis and Novotel, through a master franchising agreement. China Lodging would then embark on a major expansion for that part of the business, adding 350-400 hotels over the next year, a huge addition from the current count of 102.

The second part of the deal will see China Lodging, whose own brands include the budget Han Ting chain, form a joint venture to manage Accor’s more upscale brands, which include the Sofitel and Pullman brands. That part of the business will remain more in the control of Accor, which will hold a majority stake of the new joint venture.

The deal looks quite well conceived, bringing together 2 partners whose strengths are quite complementary. China Lodging is an established budget hotel operator with plenty of China expertise, while Accor has abundant experience in the middle to upper end of the market and strong global connections. Accor was  one of the later major global players to come to China, and this deal should help it to catch up in the market.

An equity tie-up also looks like a good vehicle to start this relationship, and I could easily see Accor boost its stake in China Lodging and even buy the company later if the partnership works well. We’ve seen a bit of minor M&A within China’s domestic market over the last few years, but this is the first major cross-border partnership. That leads to the next question of whether we’re likely to see more similar deals following this one.

My answer to that question is a fairly certain “yes”, which raises the next question of what companies might form such new alliances. Three of the biggest domestic names to watch are Home Inns, Jin Jiang (HKEx: 2006; Shanghai: 600754) and 7 Days, all of which have ties to global financial markets and might be seeking such a partner.

Among the big global brands, Hilton (NYSE: HLT) and Intercontinental (London: IHG) seem the most likely to seek such partnerships, though we could also see a pairing with a big regional players like Hong Kong-listed Shangri-Li (HKEx: 69). Following the Accor deal, I would put the chances quite high, perhaps around 70 percent, that we’ll see another major cross-border tie-up in China’s hotel sector in the new year ahead.

Related posts:

(Visited 175 times, 1 visits today)