European hotels: M&A market and deal process snapshot

The near freezing of the market in the early days of the pandemic is now firmly in the past. Back then there was a sense that there would be a huge opportunity to buy at distressed prices. In practice, it hasn’t worked out that way, and today’s deals are largely being driven by longer-term trends. In particular, we continue to see push for ongoing consolidation within the industry, and the impact of significant pools of capital looking for a return.

What are we seeing in the European hotel M&A market?

At the same time, uncertainty remains as to the future long-term outlook for, in particular, corporate travel. Against that backdrop, we expect to see parties working hard to agree valuations and, for the moment, a focus on targeted rather than transformational M&A.

Who do we expect to be active on the buy-side?

Mid-to-large sized international hotel operators are looking for interesting bolt-ons

There are plenty of operators who remain relatively well-capitalised and have access to financing who are looking for bolt-on or add-on deals, like when Marriott acquired brands such as AC Hotels.

Private equity and sector funds have continued to accumulate their dry powder

European PE firms have US$351.6 billion of dry powder available, an increase of nearly US$50 billion from 2020, according to research group Preqin. In the sector, we saw KKR announce in July that it had raised US$2.2 billion for a new real estate fund to seek investment opportunities in Europe, including in hospitality. Whilst in August, Schroder Capital’s debut discretionary pan-European operating hotels fund reached EUR525 million of investor commitments. Abundant liquidity and low interest rates in the debt markets mean attractive leverage should be available to private equity and funds alike.

Acceleration of the trend of family offices investing into the hotel sector

Bill Gates’s recent acquisition of the controlling stake in Four Seasons Hotels and Resorts is an example of the accelerating trend of family offices and ultra-high-net-worth individuals looking to invest in hotels. That trend has been global in nature including, in Europe for example, with MID and the Wenaas Group.

North Americans on the hunt for de-SPACs

In North America, in the first half of 2021 alone, 363 SPACs listed raising US$111.7 billion. With the clock ticking on them, they have been seeking buy-out targets in Europe, including in the hospitality space.

Don’t write off the impact of European SPACs

During the worst of the pandemic the consensus amongst European bankers was that Europe had been too late to the SPAC party. Indeed, the revised rules on the London Stock Exchange only came into force in August, by which time SPAC listings in the US had already slowed due to regulatory intervention and investor scepticism. However, confidence is building as early deals launch across Paris, Amsterdam and Frankfurt. Accor’s Paris EUR300 million SPAC in June in particular raised interest. In addition, the EUR1.2 billion Frankfurt De-SPAC involving HomeToGo is seen as a model for more European de-SPACs. It is rumoured that there are more than 50 European SPAC deals potentially ready to launch by Q1 2022, several of which are then expected to be on the hunt for their own de-SPACS in the hospitality sector.

As we return to normality, what has been the impact of the pandemic on deal processes and terms?

Sellers need to be more prepared than ever for due diligence

A well-prepared due diligence process can create critical momentum in deals. The impact of the pandemic means sellers should be prepared to answer a number of new questions. For example, they should be ready to explain any drop in investment in the last 18 months and how that has been well-managed to protect value. Buyers will expect full disclosure of any government support and the wider impact on the business. Other areas of particular focus include taxation (for example, did the target secure any tax holiday?) and employment (for example, did the target comply with applicable laws in connection with furlough and vaccines?).

According to a recent survey by Investec, 94% of private dealmakers in the wider M&A market have conducted investment due diligence virtually during the pandemic. However, although virtual data rooms and diligence sessions are here to stay, given the nature of the businesses it is no surprise that hotel M&A is already largely seeing the return of more physical diligence.

Physical negotiations return to fashion

Although some deals will continue to be done remotely, in our experience, physical negotiations are already reappearing rapidly. Where parties are keen to execute, there is no substitute for applying pressure to the process and to quickly build trust than to get people together in the same location.

Contractual terms can help bridge valuation gaps, but it is not a strong trend in the sector

The nature of the hotels sector does not always lend itself to earn-outs. This is partly because buyers will typically expect a free hand post-closing. However, for some more uncertain geographies, we are seeing discussions around holdbacks or partly deferred consideration to bridge risks around future industry trends.

Buyers in European deals shouldn’t necessarily expect COVID-19 related walk-away rights

During the height of the pandemic, it became more common to see material-adverse change walk-away rights for the buyer for COVID-19 risks. However, these are now being resisted by sellers on the basis that buyers have sufficient information to form a commercial risk judgement.

Expect a detailed discussion on price adjustment mechanisms

Where deals are done on a completion price adjustment basis, then a lot of time is being spent on determining how normalised working capital should be calculated. The last 18 months will have distorted many accounts because of reduced revenues, new areas of operating expense and the impact of government support, and it can take a lot of effort to agree the “true” picture. For similar reasons, some buyers do not always trust that locked-box accounts show an accurate picture of the target and are therefore often resisting locked-box adjustment mechanisms.

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