Morgan Stanley Analyzes The Lodging Sector's M&A Potential

The hotel space could certainly get a little cozier.

Amid market fragmentation and rising competition from alternative accommodations, Morgan Stanley sees prospects for consolidation.

The Ratings

Analyst Thomas Allen reiterated Overweight ratings on Hilton Worldwide Holdings Inc HLT and Marriott International Inc MAR. Morgan Stanley has Equal-weight ratings on Choice Hotels International Inc CHH, Extended Stay America Inc STAY, Hyatt Hotels Corporation H, InterContinental Hotels Group PLC (ADR) IHG and La Quinta Holdings Inc LQ.

The Thesis

Compounding challenges in the industry may incentivize merger pursuits, Allen said in a Friday note. (See Allen's track record here.) 

“Given the current low RevPAR [revenue per available room] growth environment, we believe operators could consider other avenues to create value, and with Marriott-Starwood so far illustrating a successful integration, we see potential for further consolidation,” Allen said. 

Morgan Stanley identified 25 permutations that could be accretive to shareholders with pro forma leverage with a multiple less than five. 

The three most accretive involve Choice’s purchase of either Whitbread, Extended Stay or La Quinta. Rounding out the top five are Hyatt or Hilton’s purchase of Whitbread.

Whitbread is seen to be the most accretive target for every industry player with the exception of Extended Stay, Allen said. Extended Stay and La Quinta are considered the next most accretive targets.

Accor and Choice could see the greatest accretion as buyers, followed by Hyatt, Hilton and Marriott, with the order dependent on seller.

Morgan Stanley’s model assumes the hypothetical buyer pays a 20-percent premium to current value; 3-percent revenue synergies; 50-basis-point margin improvement in both businesses; and a transaction funded with 50 percent debt and 50 percent stock.

Price Action

At the time of publication, shares were relatively unmoved by the report, with Marriott up 1.4 percent, Hilton 1.2 percent and the valuation of the rest trading by less than 1 percent difference Friday. 

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Posted In: Adrija ChakrabortyJamie RolloMark SavinoMorgan StanleyThomas AllenAnalyst ColorTravelAnalyst RatingsReal Estate