The struggle for Six Continents
Those with inflated egos among the board of Six Continents might have interpreted last month's vote in favour of a demerger as a vote of confidence for the company's management. But the chances are that shareholders are just holding out for an auction that could see the company broken up even further than its initial split into the hotels company, InterContinental Hotels Group, and pub group, Mitchells & Butlers.
Now that Hugh Osmond is out of the frame, the vultures are circling, and Six Continents' bids committee has been running the rule over a number of options put forward. Last week it turned down a bid for £2.8b for its pubs division from private equity group BC Partners.
Some venture capitalists firmly believe that they, or their associates could run the company better. Others seem assured that the current board can turn things around, despite it having been one of the stock market's worst performing hotel companies last year. However, criticism has been directed towards strategic management rather than at operator level.
"They bought a huge chunks of assets, paid too much for them and have spent too much on them," one analyst sums up.
In 1999, in a deal with Punch Taverns, Six Continents bought Allied Domecq's pub estate for £2.75b. It has spent about £500,000 on each pub, many of them being converted into the successful brands O'Neill's or It's a Scream. One industry source estimated the original investment was giving the company an 8.9% return.
"This is about 2% lower than their peers, which isn't too bad."
Once the demerger goes through, it is expected that, on the pubs side, chief executive Tim Clarke may look to the market for a share buy-back and in doing so take on more debt. This would enable the group to buy more stock and bump up its value to potential bidders. Analysts believe they could achieve at least £3.4b in an auction situation, so it is little surprise that the company turned down the £2.8b proposal from BC Partners.
However, more scorn is poured on the hotels side of the business. As one analyst points out: "Whitbread, which runs Marriott hotels, can make twice the profit of Six Continents' hotels - even after its franchise fee. It has been a mystery why the returns haven't come through."
Necessary evil
Part of the mystery could be explained by the money spent on a massive refurbishment programme. Hotel refurbishment is a necessary evil. It takes a long time to carry out, costs an obscene amount of money - not least in lost business - and can take two to three years to realise the benefits.
Since buying InterContinental Hotels, for £1.8b in 1998, the company has pumped £450m into its 10 flagship hotels around the world over the past five years.
One exception is the London flagship, the May Fair InterContinental, which is on the market with hopes to raise up to £150m. Whether the company will achieve that amount is another matter - it needs about £63m spending on it. That aside, the InterContinental group of hotels, appears to investors to be the jewel in the crown and could be the first to go.
"I would seriously question whether InterContinental is an integral part of the group. I can't see why it would need to be part of the company," says Chris Rouse, director of consultants, Insignia Hotels.
Many industry observers share Rouse's opinion. The four/five-star brand is generating much interest among other hotel groups where it could sit comfortably. Both Starwood, which owns the Sheraton brand, and Marriott have been linked to a consortium put together by investment group CVC Capital Partners. A takeover involving hotel groups could mean the ousting of the current hotel management, headed by Richard North.
Other proposals, however, such as those being prepared by Strategic Hotel Capital, favour the current management. The Chicago-based investment firm run by Laurence Geller already owns the InterContinental in Prague, where Six Continents has a management contract. Geller describes the current team as "good people with good plans".
"We talk with them all the time. A deal would realise cash to the hotel group. We would own the assets and it would be a pure management contract," Geller says.
At operator level, there is a firm belief that the company needs to pay greater attention to defining its brands. The group franchises the Holiday Inn, Holiday Inn Express and Crowne Plaza brands - although it also owns and manages some Holiday Inns.
"They need to listen to their franchisees," says Roy Murray, managing director for franchise service Europe for Cendant Corporation, which holds the master franchise for brands such as Howard Johnson and Days Inn.
"InterContinental and Crowne Plaza are the same thing, they need to re-address them. Holiday Inn is the oldest brand and they should use that to their advantage. They should make more distinction between Holiday Inn and Holiday Inn Express," he adds.
There has been tension brewing among the franchisees since Six Continents bought the Posthouse group from Forte in 2001. It transformed 79 hotels to Holiday Inns providing Holiday Inn the critical mass it desperately needed in the UK, but also created a conflict of interests with its franchisees.
"We felt a shift in priority. Head office is no longer looking after the franchisees as much as they were because their focus changed and they now own and manage Holiday Inns," says Ronnie Cameron, general manager of the Holiday Inn in Kensington, London.
From a UK perspective, Cameron believes that they should get rid of Crowne Plaza and concentrate on Holiday Inn.
"It's also good to be associated with InterContinental, it's a nice brand. To sell it would be like selling the family silver," he says.
Whoever ends up owning the Holiday Inn and Crowne Plaza franchise needs to take into consideration the brands' standing internationally.
"If someone split up the Holiday Inn and Crowne Plaza it would be of major concern because of the synergies across the brands," says Jay Fisher, chairman of the International Association of Holiday Inn Franchisees, representing about 2,600 hotels worldwide.
Fisher has been vocal in his backing of current management, but he concedes that the people he deals with are at operator level, those that know the hotel industry inside out, rather than the boardroom where the main objective is to satisfy shareholders.
"What they need to do," he concludes, "is to end up with clearly defined brands in both the eyes of their investors and the consumers. Whether they can do this in a cost-effective manner remains to be seen."
Countdown to a demerger
October 2002: Six Continents announces proposed separation of its hotels and pubs business and the return of £700m of capital to shareholders.
6 Feb: David Bland, managing director of Six Continents Hotels EMEA, is edged out of the top position. Richard Hartman, formerly managing director of Six Continents' Asia-Pacific division, replaces him. Bland takes the new title of vice-president commercial.
17 Feb: Six Continents reveals details of its demerger, to cost £109m. It claims savings by the hotels division of £31m by end of 2004 and an annual £10m savings by its pubs division.
3 March: Hugh Osmond's investment vehicle, Capital Management and Investment (CMI) launches an unsolicited £5.6b bid for Six Continents which is rejected the same afternoon. A battle of words ensues between Six Continents and CMI.
5 March: Six Continents franchisees threaten to switch to rival brands if Hugh Osmond is successful in his £5.6b bid to take over the company.
12 March: Shareholders vote in favour of the demerger.
19 March: Frank Croston, area president for the UK & Ireland at Six Continents, resigns.
21 March: Hugh Osmond sells all his Six Continents shares generating, profit of about £1.5m.
24 March: Confirmation that 800 jobs worldwide to be cut from its corporate and support departments.
27 March: Six Continents confirms it has rejected a £2.8b bid for its pubs, known to be BC Partners.
15 April: Official first day of separate trading as InterContinental Hotel Group and Mitchells & Butler.
The Brands
Hotels
Six Continents owns, manages or franchises midscale and upscale international brands with more than 3,200 hotels across 100 countries.
InterContinental, Crowne Plaza, Holiday Inn, Holiday Inn Express, Staybridge Suites
Pubs and restaurants UK based network of over 2,000 outlets of which more than 900 are branded:
Alex, All Bar One, Browns, Edward's, Ember Inns, Goose, Harvester, Hollywood Bowl, It's A Scream, O'Neill's, Toby Carvery, Vintage Inns
