Berenberg Sees M&A Activity Just Beginning In The Leisure Sector

Stuart Gordon of Berenberg continues to advocate that the leisure sector remains ripe for further consolidation, and the acquisition of Starwood by Marriott is just the first large deal of many to come.

According to Gordon, the leisure space remains suited "for consolidation for four reasons: 1) debt remains cheap, 2) valuations are below their historical highs, 3) the potential for "substantial" synergies and 4) OTA (online travel agencies) are consolidating with "little likelihood" of any regulatory intervention.

Related Link: Canaccord Upgrades Marriott, Likes Starwood Acquisition

Gordon continued that the hotel industry "is and remains a structural growth story," as the top six global companies dominate the worldwide pipeline and represent around 75 percent of all new planned hotel openings. The analyst suggested that this could deliver 4 to 6 percent of gross increases in the system per annum and a growth between 2.5 and 5 percent per company.

Initiation

Gordon initiated coverage of several U.S.-based hotel chains, including Starwood, Marriott and Hyatt Hotels Corporation (NYSE: H) with Buy ratings. Of those names, the analyst's top pick is Marriott.

Marriott, Starwood Deal To Create ‘Significant' Upside'

Gordon noted that Marriott's bid for Starwood has "met with a lukewarm reception" given the deal structure. The analyst stated that he is "more sanguine" on the structure, and it will deliver significant upside for both sets of investors as synergies could exceed $200 million.

Gordon further argued that the deal will create the world's largest hotel group. He added that in today's digital and mobility age, the type of scale that will be realized by merging the two hotel chains, is "critical beyond the simple synergies that will be derived."

Finally, the analyst pointed out that Marriott has bought back 146 million shares of its own company over the past five years – and will be able to buy back at least the same amount of shares over the next five, even at a higher stock valuation.

Hyatt Hotels: Justified Valuation

According to Gordon, Hyatt has the highest real estate valuation among all of the large peers, relative to its $7.6 billion enterprise value. This should be of "little surprise" given the fact that the company owns or leases almost 13 percent of its room portfolio – outranking the group average of just under 7 percent.

With that said, Gordon argued that Hyatt "clearly leads the way" in terms of potential value, which could be created by a divestment program. In other words, investors should be "reasonably confident" that future asset sales will "continue to unlock value" in Hyatt's portfolio.

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