It has been a big morning for the hotel sector with takeovers, soaring share prices and fallout from the Hong Kong protests all featuring.

Shares in luxury hotel operator Elegant Hotels (EHG:AIM) have soared 56.3% to 109.4p after it agreed an all cash 110p per share offer from Marriott International.

Elegant Hotels operates upscale hotels in Barbados and St Lucia, and Marriott highlighted the ‘strong and growing consumer demand for premium and luxury properties in the all-inclusive category’ in a statement on its deal with Elegant.

The agreement, subject to shareholder approval, values Elegant at £100.8m.

M&A CONTINUES AS VALUATIONS FALL

The takeover offer comes amid a tough time for some UK-listed hotel companies, as Brexit uncertainty and a gloomy global economic picture take their toll.

AJ Bell investment director Russ Mould said that despite this backdrop, big firms in the sector are continuing to make acquisitions.

He said, ‘Suitors will be taking a long-term view and also taking advantage of valuation weakness among UK stocks.’

Before the takeover bid, Elegant’s share price had been on a downward trend from around 90p two years ago to around 70p this week.

The firm has net debt of $68.9m and reported just marginal growth in its half year results for the six months to 31 March.

INTERCONTINENTAL STRUGGLES

Another hotel firm grappling with a gloomy backdrop is Holiday Inn owner Intercontinental Hotels (IHG), whose share price dropped 3.2% to £45.85 following a weak third quarter update.

InterContinental's Six Senses in London

Hit by more difficult trading conditions in the US and China, revenue per available room (RevPAR) – a key metric used by the industry – was down 0.8%. RevPAR in Greater China, an important market for the firm, was down a whopping 36%.

Mould said, ‘Weaker economic conditions are bad news for big hotels catering for business travellers. Corporates often look closely at their cost base when times get harder and travel is an easy place to make cuts.’

Hotels are operationally geared and generally have a large amount of fixed costs, meaning that in good times profit can rise at a much faster rate than revenue. But in a downturn profits can fall much faster than sales.

Mould said this is ‘fine when demand is strong’ but added that if there’s a global economic downturn, ‘then the hotel sector could face a situation where prices fall due to excess capacity.’

EASYHOTEL SHINES BUT WARNS ON OUTLOOK

On the more budget end of the hotel scale easyHotel (EZH), another hotel chain recently subject to a takeover offer, reported a more upbeat trading update.

In the year to 30 September, it reported that revenue was up 56% to £17.6m, with like-for-like RevPAR up 7.7%.

Its shares jumped 11% to 110p on the news.

Though it did warn on the outlook going forward, and cited a note from hotel research firm STR Global which stated that the UK mid-scale and economy segment of the hotel market has continued to be impacted by the ongoing political and economic uncertainty.

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Issue Date: 18 Oct 2019