Joining forces
Ladbroke's Hilton hotels chain is set to double its size in the UK with the takeover of Stakis, and will become the UK's second-largest hotel group. The number of Hilton hotel rooms will leap from 8,093 to 16,147 as Stakis's 54 hotels are added to Ladbroke's 38 Hilton UK hotels. The new headquarters will be in Watford, with inevitable job losses at Stakis's Glasgow headquarters. The new group expects pre-tax profits of about £400m this year. Annual cost savings of at least £16m are predicted.
Last week, Stakis chief executive David Michels tied the knot with leisure giant Ladbroke following the latter's successful takeover bid. He also gained the in-laws - Hilton Hotels Corporation - by becoming chief executive of Hilton International.
Industry alliances are a phenomenon that has affected hospitality at all levels and in differing ways, from Granada's controversial takeover of Forte to Whitbread's new role as master franchisee for Marriott.
The Stakis/Ladbroke liaison means that, in the short term at least, before the inevitable round of disposals, Michels will run the UK's second-largest hotel chain, with 16,147 rooms, nudging the Whitbread Hotel Company into third place.
For Stakis, the move is highly strategic. As well as achieving economies of scale, hotels that become part of larger groups gain access to bigger reservation systems, have extended use of loyalty card facilities and generally benefit from wider brand recognition.
Under the deal, which values Stakis at almost £1.4b, Stakis shareholders will receive 60% of Ladbroke shares and 40% cash for each share they own. At its annual general meeting on 14 May, Ladbroke is expected to ask shareholders to approve a resolution to change the name of the parent group listed on the stock exchange from Ladbroke Group to Hilton Group.
Many other details still have to be ironed out, however - such as how the hotels will be rebranded, what will happen in a location where there is already both a Stakis and a Hilton, and how two companies with different cultures will manage the process of change.
As examples of duplication emerge, there will inevitably be casualties. No newly constructed hotel company wants to carry two marketing departments, two sets of human resources, two technology departments. This means the loss of some high-flyers - David Jarvis, chief executive of Hilton International, John Bamsey, managing director of Hilton UK, and Stakis finance director Neil Chisman are three recent casualties.
Stakis and Hilton are just the latest players in the takeover trend, which saw Ladbroke acquire Hilton in 1987, Mount Charlotte acquire Thistle Hotels in 1989 and the well-documented Granada/Forte takeover.
So why does it happen? The most recent outbreak of merger mania was inspired by the stock market crash last autumn. Rising interest rates and a strong exchange rate led to rumours of recession. Fearing a repeat of the slump of the early 1990s and assuming that hotels would be the first to suffer, City confidence in hotels plummeted.
As a result, hotel stocks were downrated by about 40% relative to the market. For operators, this was a spur to join forces, cut costs and achieve greater shareholder value.
So if merger mania has reached epidemic levels now, it is because City analysts and investors believe it needs to happen while there is still value in those discounted, de-rated stocks in order to achieve the best possible outcome when the upturn comes.
Inevitably, change brings uncertainty. Roy Tutty has first-hand knowledge of how this feels - he was chief operating officer at Forte when it was snared by Granada. Tutty now works for Arcadian Hotels, which was bought by Real Estate Investment Trust (REIT) Patriot American last year. At the time, Patriot's paired-share status gave it considerable tax advantages, allowing it to snap up everything in sight. That loophole has since been closed, leaving little capital for expansion and people like Tutty facing an uncertain future.
Tutty refuses to comment on Arcadian, but is eloquent on the issues surrounding mergers. "Some of the pitfalls are aboutthe integration programme and how one integrates different cultures," he says. "The usual situation is that the actual mergers always have a winner and a loser."
In the case of Hilton/Stakis, most industry watchers deem the fusion to be a marriage made in heaven, a winning combination for both sets of shareholders. A lucrative takeover must result in both cost savings and increased revenue. Stakis is currently converting increased room revenue into profits growth at twice the rate of Hilton UK. The same financial wizardry applied to Hilton could give £6-7m extra profit, on top of the £12-16m of synergy benefits that the two players have already highlighted.
Much of the City's confidence is placed in David Michels, who brought Stakis back from the brink of financial ruin when he joined as chief executive in 1991. This confidence is mirrored in the share price of both parties. When the bid was announced, shares in Ladbroke rose by 12.5% to 259.8p and Stakis shares jumped by 9.2% to 154p.
Hilton brings the brand name to the relationship but is generally thought to be the lighter on management skills.
When two companies merge, a blending of cultures is inevitable, with the inherent risk that one party will have to sacrifice more than the other. When Whitbread became the master franchisee for Marriott by acquiring 16 Marriott branded hotels from Scotts Hospitality in 1996, it had to take on not just two cultures, but three. "It took us a year to work this all out," recalls Alan Parker, managing director of the Whitbread Hotel Company. "We all had to get on the same wavelength."
In the case of Marriott and Whitbread, getting on the same wavelength meant sharing the vision. Marriott is people-focused, working on the basis that if you look after staff, they will look after your customers, encourage repeat business, more revenue and profit.
Coming from an essentially bottom-line-driven business, Parker admits it was initially difficult to see how this would work. When two parties come to the altar, talk is cheap. Persuading your partner genuinely to believe your vision is more expensive.
As in any relationship, tolerance is a necessity, patience a virtue. This is particularly important when going down the potentially more dangerous franchise route. All parties have to understand what is required. "We do not tolerate or accept franchisees who want to live off our brand and not enhance it," says Bill Marriott, chairman and chief executive of Marriott International.
Parker agrees. "There's no point in papering over the cracks in a relationship that isn't working," he says. "You've really got to get the right partner to start with."
Over the past few months, it has been rumoured that Whitbread itself could be courted by Granada. Naturally enough, Parker dismisses the notion. "One can always speculate and it helps sell newspapers, but I think the Granada board made it very clear that there was absolutely no foundation for that rumour at all. Ask Charles Allen [chief executive of the Granada Group]."
On that point, Allen is circumspect. He prefers not to comment, although the general industry view is that Whitbread, with its breadth of high street brands, would not necessarily be the best spouse for Granada.
Allen is more forthcoming on Granada's view of Stakis/Hilton, however. Posthouse, one of the nearest competitors to Stakis and Hilton, is in the process of being repositioned at the top end of the three-star market.In most cases it will not compete in the same arena, leaving Hilton/Stakis as a minor threat.
Based on his own experience of takeovers, Allen's advice is to make decisions quickly. He is also forthright about what should happen to company cultures when two parties tie the knot. "It's crucial that a new culture is created. It's a bit like the Labour Party - you've got to create new Labour, or new Forte, taking the best bits from the old."
Niche markets
Ironically, Allen's former adversary, Sir Rocco Forte, has also chosen a more niche market, this time targeting the de luxe sector. Mindful, perhaps, that part of Forte's problems stemmed from the huge, unwieldy animal it became, Sir Rocco's new company, RF Hotels, will remain small - just 20 properties throughout Europe over the next few years.
The Granada takeover may be well in the past, but the memories remain. For Sir Rocco, the losers are individuals, usually family members who own just a small part of the company. "Individual shareholders in Forte turned down the Granada bid but they only had 8-10% of the shares," he recalls.
The story is similar with Stakis. At its annual general meeting in February, it became apparent that many private shareholders wanted the company to remain Scottish. But given that institutions hold more than 87% of Stakis shares, their pleas fell on deaf ears.
Talk of mergers is often negative, focusing on redundancies and presenting change as inherently bad. But there can be advantages. New jobs are created as well as destroyed, and sound marriages are likely to stimulate the market, making hotel shares a more secure opportunity for investors.
Perhaps the biggest loss is a sentimental one. Much as Britons mourn the phasing out of the old British passport, so the news that another family hotel group is about to pass into the ether is greeted with grief. With both Forte/Granada and now Stakis/Ladbroke, emotions are running high. Inevitably, not every suitor is considered right for the one you love. n
