Andrew Sangster examines the importance of the recent joint venture between Whitbread and Marriott and asks just how powerful will Marriott be?
Whitbread's decision to restructure its business, quitting standalone restaurants in favour of joint sites with its Premier Travel Inn budget hotels, has been the focus of recent press attention on the company.
But just as interesting for the wider hotel industry is the sale of hotels in a joint venture with US giant Marriott International, announced a couple of days before the news on Whitbread's budget hotels.
The importance of the deal is not down to the intrinsic size of the transaction - in Marriott terms, it barely impacts on its results. It matters because it is the latest clear example of Marriott's ability to recycle capital to pursue its relentless growth strategy.
Let's take a moment to review the transaction. The deal saw 46 Whitbread hotels in the UK sold-off, boosting the coffers of both parties involved in the joint venture.
Marriott netted £100m, repaying the £90m it injected into the arrangement with Whitbread. Whitbread received £237m on top of the £710m it obtained last year when the joint venture was created.
The buyer was the Royal Bank of Scotland (RBS), which paid a total of £951.4m for the 46 hotels and agreed to pay another £30m for the Leicester Marriott development on completion, scheduled for June.
RBS is expecting to unload a portion of the equity in the Marriott portfolio to a syndicate of investors put together by Israeli businessman Igal Ahouvi.
Crucially, Marriott retains the management contracts on the latest batch of hotels and now manages 76 properties in the UK.
During the current year, Marriott is to raise around $1b through sell-offs of previous acquisitions. At the same time its on-going hotel operations are generating pots of cash.
Last year, Marriott handed back $1.65b to its shareholders but it intends to give back less in 2006, perhaps as little as $1b.
The slackening pace of share repurchases comes despite a marked increase in cash generation as a result of improving hotel performance. Marriott's most recent results, for the first quarter of this year, show that 49% of its managed hotels are now receiving incentive fees (an extra amount paid out of sales when individual hotels reach a certain level of agreed performance). This compares to 28% in the first quarter last year. During the peak year 2000, some 70% of managed hotels had incentive fees.
In its core home territory of North America, margins on Earnings Before Interest Tax Depreciation and Amortisation were up 230 basis points despite energy costs rising by as much as 20%. The margins are now just two percentage points below the previous peak in 2000.
What all this means is that Marriott has a growing cash pile, giving it big firepower with which to make acquisitions.
It is understood to have looked closely at buying InterContinental Hotels in the past year and is keen to make an acquisition. Maybe Whitbread should beware in case its former partner turns predator.