The U.K.'s InterContinental Hotels Group plc on Tuesday broke with its habit of selling real asset and returning cash to shareholders to strike a $430 million deal to buy privately held Kimpton Hotels & Restaurants and create the world's largest boutique hotels business.
San Francisco-based Kimpton, like InterContinental, is an "asset-light" company, meaning it doesn't own much of its real estate. Founded in 1981 by Bill Kimpton, it operates 62 hotels, with 16 further hotels in the pipeline, as well as 71 bars and restaurants located at its hotels.
InterContinental CEO Richard Solomons defines "boutique" accommodation as properties with "individual characteristics and limited brand hallmarks" and noted that it is the fastest-growing segment of the hotels sector. Kimpton is already the largest player in the segment and its combination with InterContinental's Hotel Indigo and Even Hotels chains will create a larger No. 1.
Solomons described Kimpton as "clearly differentiated but not too edgy," noting that its core customers were 35- to 55-year-old business travelers. The chain offers extras such as yoga mats and is "100% pet friendly," Solomons said on a conference call.
"It is a great brand with enormous potential to grow both within the U.S. and globally," he said.
The agreement comes a month after activist investor Marcato Capital, also of San Francisco, launched a new bid to get shareholder backing for a shake-up at InterContinental by releasing a report compiled with adviser Houlihan Lokey Inc. that claimed a merger could boost the U.K. company's valuation by 100% or more.
The investor owns about 4% of InterContinental and wants InterContinental to sell itself to a larger player. In its report, it presented potential takeover scenarios involving six possible suitors for the U.K. group, having first intervened in May after InterContinental was reported to have received and rejected a £6 billion ($9.4 billion) bid from a mystery American suitor.
InterContinental has never confirmed the proposal, which two U.K. media outlets suggested came from Starwood Hotels & Resorts Worldwide Inc. (HOT) or Wyndham Worldwide Corp. (WYN) . A message was left seeking comment from Marcato on the Kimpton deal.
InterContinental, of Denham, near London, has more than 697,000 rooms worldwide and since 2003 has returned $10.4 billion to shareholders — this year's returns stood at $1 billion as of August. It has done this by selling hotel properties while forging management contracts with the buyers. Its shares traded marginally lower as European indices declined on Tuesday. At the current price of 2,407 pence, InterContinental has a market value of £5.68 billion.
InterContinental said Kimpton expects to double its Ebitda to $39 million by the end of 2017 from a forecast $20 million in 2014. It noted that the purchase will be earnings enhancing in its first full year and achieve returns above its own cost of capital by year three. It will use existing cash and new debt facilities to fund the purchase, which is expected to close by the end of March.
Tax relief linked to the amortization of the acquired assets will be about $160 million, the buyer said. Kimpton chief operating officer Mike DeFrino will stay on to lead the acquired business for InterContinental.
Bank of America Merrill Lynch acted as financial adviser to InterContinental.