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Starwood and advancement of “asset-light” strategy 10 Jun 2015

Starwood Hotels and Resorts Worldwide announced in April 2015 that it was exploring strategic and financial alternatives to increase shareholder value. Lazard Ltd, one of the world’s leading financial advisory and asset management companies, was hired by the global hotel chain to advise on this review and until completed, no comments will be made by either party. This intervening period has opened up the floor to various speculations about the direction Starwood would eventually take in the near future. It would of course be interesting to see what impact, if any, the review would have on existing and future Starwood properties in Nigeria and the African continent, in general.  

The shake-up    

Earlier in February 2015, it became quite apparent that things were being shaken up at the company’s senior levels. It was announced that Fritz van Paasschen had resigned his position as CEO, a job he had since 2007. Some other senior executives of the company had also resigned prior to this announcement. Adam Aron, who had served on the board of directors since 2007, was selected to take over as interim CEO until a more permanent solution was found. According to Chairman, Bruce Duncan, the resignation was based on a mutual agreement between the board of directors and Paasschen.

The board has been seeking a faster pace for the sales of Starwood-owned properties and increased signings of franchises and managed agreements. The goal has been to increase shareholder value. The hotel industry is experiencing high revenues and positive growth, so there has been very little patience for the mixed results that the company has been presenting. Starwood’s share value returned 10 per cent last year, compared to at least 30 per cent returns which major rivals such as Marriott and Hilton were offering. The company’s revenue fell 2.9% to $1.42 billion in the first quarter of 2015.

Other areas in which Starwood has lagged behind its peers are in rolling out successful new brands and acquisitions of new ones. Marriott in particular has been on an acquisition roll in recent times, particularly with the acquisition of South Africa-based Protea Hotels in 2014 and the Canadian Delta Hotels in 2015. In 2012, it also acquired U.S.-based Gaylord Hotels. Speaking with attendees at the Arabian Hotel Investment Conference in Dubai early last month, Arne Sorenson, Marriott’s CEO, was quick to downplay the possibility of either Marriott or Hilton acquiring Starwood. He highlighted various other options open to Starwood at this time. He posited that one of such options could be a buyer emerging from either the Middle East or Asia. Other possibilities, Sorenson said, would be Starwood itself buying an equally strong competitor. Or the company simply maintaining the status quo and hiring a new CEO.

The “asset-light” strategy

Starwood also recently announced plans to spin-off its vacation ownership business, thus creating a completely separate publicly-traded company to manage those operations. With the option of maintaining the status quo, there is also a chance for the company to further advance its strategy of maintaining and increasing its portfolio of managed and franchised properties, while disposing of its owned properties. The “asset-light” strategy has been in effect since 2006, and to date, the company has sold about 87 properties, realizing a cash estimate of approximately US$7 billion.

Many non-industry professionals do not realize that most major hotel chains, since the turn of the century, have dramatically reduced their ownership of hotel assets. In an article on the benefits of going asset-light, When “Asset Light” Is Right, published last September, the Boston Consulting Group argued that the asset value of the five largest hotel chains in 2014 was one-third of the value in 2002. For instance, between 2005 and 2010, Accor sold off an estimated €4 billion in hotel properties, while maintaining lease agreements, where it paid the new owners a rent calculated as a proportion of revenues. Starwood, for the most part, has employed franchise or management agreements in its sales of hotel assets. A franchise agreement allows the owner to operate the hotel, using the branding, marketing and distribution, and other operating systems of the hotel company. The hotel may be operated by the owner or by a third-party management company.

A management agreement allows the hotel company to brand and operate a hotel for the owner. Both the franchise and management agreements require the payment of certain fees to the hotel company. In Nigeria, the greater proportion of branded hotels are operated under a management agreement. That is, although they are internationally branded, they are not actually owned by these hotel companies. The owners are typically local entrepreneurs and institutions. A notable exception to this, is the Best Western chain, which adopts a wholly franchise system. All Best Western properties are operated either directly by the owner, or by a third-party management company. The owner pays a franchise fee to Best Western, and the benefit is the international branding, marketing and distribution systems that the property is connected to.  

The asset-light model has served hotel companies by freeing up capital that was tied in real estate to allow the company focus on its core business of hotel management. This has allowed hotel companies focus on increasing their development pipelines in emerging markets such as Nigeria. Capital is also freed up to invest in and improve upon technology, training, developing new brands, and generally improving the quality of hotel operations, as opposed to managing the real estate. It has also allowed companies to better manage profitability – the income from management and franchise fees are more predictable and less susceptible to variations in fixed costs. Management fees, for instance, are normally based on hotel revenues and gross profits, hence above the line before deductions for debt interest, taxes, depreciation and amortization are made.  

 
As shown in Figures 1 and 2, the number of hotels Starwood directly owns, as of April 29th, 2015, is 3 per cent of its total portfolio of 1,236 hotel properties and over 348,000 rooms worldwide. This accounts for less than 40 properties (and approximately 10,000 rooms).

Advancing local partnerships in Nigeria

In light of Starwood’s current considerations, we believe that of the likely options highlighted, it should be most beneficial for the company to maintain the status quo, at least in the medium term, and focus on maximizing its asset-light strategy. In a quarterly conference call made in April 2015, Adam Aron, interim CEO, affirmed Starwood’s confidence in achieving “US$800 million in dispositions in the balance of 2015, while maintaining these hotels’ continued participation in the Starwood system.”  

In the Nigerian context, the key take away, beyond highlighting strategic changes at a major hotel chain, is to underscore the need for local partners in the development of international hotel chains in the local hotel industry. In order to accelerate the development process, credible local owners – whether individual or institutional – with access to viable financing options are a required element.  


This blog post was written in collaboration with Vivian Nweke, a consultant at W Hospitality Group. She holds degrees in Business Management from Unversité d’Orléans, France, and European Languages from Nnamdi Azikiwe University, Nigeria. She is a member of the Nigerian Institute of Management.