Esprit d'Accor?

Like a courting couple who have had the latest in a string of public rows, Accor's on-off pursuit of Granada's Méridien hotels is definitely off, says the French hotel and voucher group.

Accor's bid for Granada Compass's hotels has been an open secret for most of the second half of this year, although the move was not welcomed in all quarters.

Now, the company has moved to make its position public, saying that it has quit talks to buy Granada's 248 Le Méridien, Posthouse, Heritage and Signature hotels because the price is too high. Barring "further developments", says chief executive Jean-Marc Espalioux, Accor won't be back for the jewel in the portfolio.

The French stock market, which had feared Accor might overpay for the assets, was relieved. Accor's share price bounced back marginally, but not enough to recover the decline suffered since news of Accor's negotiations with Granada first emerged.

Whatever occurs in the next few months, Accor, Europe's largest hotelier, has been quietly building its presence in the UK over the past six years through organic growth. A deal with Granada was not essential to the company's growth in the UK.

"This acquisition was not indispensable," said Espalioux. "If Le Méridien was a way to speed up the development of our upscale segment, that would have been perfect. But if the price is too high, it becomes an obstacle to development."

Many will consider Accor's decision to pull out of negotiations with Granada at this stage a far better move than it would have been to proceed. Such a massive corporate deal after seven years of consecutive growth in the hotel sector, was always going to attract criticism that the group could be overpaying.

Accor has relatively high debt - standing at about e4.2b (£2.5b) - and investors would not welcome the sale of new stock, according to analysts. The firm's debt as a percentage of its market value was about 48% last year, compared with Bass's 43%.

Accor's share price rose 6% immediately after it emerged that its exclusive negotiations had been curtailed. "They insisted they wouldn't overpay and it looks like they're sticking to that," says Julian Easthope, hotels analyst at UBS Warburg.

However, despite this hardline statement, there is still speculation in the City that "further developments" could include a tie-up with a financial partner, to enable it to make a bid. Accor has previously carried out hotel acquisition work with US investment bank Blackstone and UK property companies London & Regional Properties and Marylebone Warwick Balfour.

"Le Méridien is the one hole in their strategy," says Easthope. Indeed, Accor has been interested in the French-founded hotel group for years, and would have bid for Le Méridien when Forte bought the group, had it been in better financial shape.

Short-term plans

Le Méridien aside, the company is committed to building up its 3,500-strong worldwide hotel portfolio by 10% a year, and is aiming to open 40 Sofitels - its four- to five-star brand - by next year.

Investors are particularly excited by the company's budget brands. Espalioux, who conceded that Accor may well make some small and medium-sized purchases in the industry, has pumped considerable sums into the budget brands - and the company still predicts huge opportunities in this area.

Michael Flaxman, Accor managing director, UK, Ireland, Central and Eastern Europe, has set demanding targets for organic growth across his region. But the budget hotels are where he really expects to see growth. "In some countries, it is easier to do that - the UK, Germany and Spain, for example," says Flaxman.

In the UK, Accor has only 65 hotels open, with 15 due to open in the next year across all the company's brands. But, due to the low proportion of lodge or budget hotels in the UK, Accor is particularly targeting this area. Just 6% of the UK market is made up of budget hotels, compared with 15% of the French market and 30% of US hotels.

Accor is concentrating on the Formule One and Etap budget brands in the UK - an Etap has recently opened in Barking in Greater London. It wants to develop UK product itself, and then sell on to an investor.

"We've refinanced a lot of the UK hotels, leasing them back from an investor on a long-term management contract. This gives us the resources to develop further," says Flaxman.

Although in the USA the company relies heavily on franchising to develop its budget network, it is not intending to do so here.

"Franchising is only just starting to gather momentum in the UK," says Flaxman. "Besides, we want to operate hotels rather than franchise them." In the UK, 70% of Accor's hotels are leased, 20% are owned and 10% are under management.

Accor's enthusiasm for the budget sector also stems from the company's eagerness to build up business from e-commerce sales. The company has been investing heavily in on-line booking organisations, believing that hotel owners and operators should have a stake in the medium through which customers find and book a hotel room.

As in other industries, Accor has joined with its competitors, Forte, Hilton and Starwood, to develop a joint-venture reservations platform over the internet.

"Buying into the distribution market is very important for us," says Flaxman. "Until today, no one has been able to justify having distribution systems for the budget sector, but sites like our accothotel.com will have the biggest impact on the budget sector."

So with more hotel openings on the horizon, recognition of the Accor brand is likely to increase here in the UK. Admittedly, pulling off a deal with Granada would have thrust the company's name in the public's face. But Flaxman is confident that both the Accor name and the individual hotel groups' names can flourish without it.

Slow and steady growth, believes the company, is ultimately better - and cheaper - than a shotgun wedding.