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Marriott’s Elegant acquisition

The luxury hotels operator has received a recommended cash offer, but will a higher offer be needed to win over shareholders?
October 21, 2019

The recommended cash offer from Marriott International (MAR:NSQ) for Elegant Hotels (EHG:110p), the operator of seven luxury hotels on the Caribbean island of Barbados, clearly makes compelling sense for shareholders of the US hotel giant.

For starters, the 110p a share cash consideration values the company’s fully diluted share capital at only $130.1m (£100.8m). This represents a 28 per cent discount to Elegant’s last reported adjusted net asset value (NAV) of $180.6m (197c, or 152.7p a share), implying that Marriott is getting hold of $50.5m of assets for free. Furthermore, including Elegant’s net debt of $68.9m, the $199m enterprise value represents around 10 times Elegant’s cash profit guidance for both the financial year’s to end September 2019 and 2020, or a third less than Marriott’s own rating on this metric. Also, Elegant’s forecast free cash flow of $13.4m for the 2019/20 financial year equates to 5.7 per cent of the $199m total consideration being offered by Marriott, based on house broker Liberum Capital’s previous estimates (now withdrawn under the Takeover Code).

In addition, Marriot plans to use Elegant’s prime real estate hotels to accelerate expansion of its recently launched all-inclusive hotel offering. There will be cost benefits, too, derived from Marriott’s strong customer brand, loyalty programme, greater purchasing power and lower cost access to capital to invest in its estate. The offer document also reveals that “in keeping with Marriot’s asset-light strategy, over time it intends to market the Elegant hotels for sale, subject to [entering] long-term management agreements under which the group would continue to manage the hotels.” In other words, Marriott has an exit strategy to realise value from the $50m of hotel assets Marriott will be getting a free ride on. It should be able to add value to these assets, too, given potential to increase profitability of the hotels. It’s not difficult to see the strategic and commercial rationale of this takeover for Marriott’s shareholders.

For their part, Elegant’s shareholders are being offered a 57 per cent premium to the company’s average closing share price over the past three months, and 52 per cent higher than when I last suggested buying the shares at the time of the interim results (‘Elegant’s improving cash flow performance’ 9 May 2019). Moreover, I have flagged up multiple repeat buying opportunities to exploit since I first advised buying the shares at 105p, at the time of Elegant’s IPO ('Checking into an elegant investment', 15 June 2015), so all of you should be well in profit. The board have also paid out total dividends of 21.08p a share since IPO.

The directors are supporting the takeover with their 16.75 per cent combined holdings, giving Luke Johnson a decent return on the 12.5 per cent stake he picked up in the autumn of 2016, and some respite after his hefty investment in cake shop chain Patisserie Valerie melted away this year. The takeover also comes at a time when Brexit uncertainty has been impacting UK visitor numbers to Barbados, and US dollar strength has reduced their purchasing power, too. That has made trading more challenging given that the UK accounts for over 70 per cent of Elegant’s bookings.

But it remains to be seen whether the company’s nine other largest shareholders who control over 45 per cent of the fully diluted issued share capital will be so keen to accept the 110p a share cash offer. Indeed, they may well try and eke out a higher offer from Marriott and one closer to Elegant’s NAV per share. It’s possible that Marriott’s offer may flush out predatory interest from other hotel giants as Melia Hotels International made an unsuccessful takeover approach in the final quarter of 2017. In the circumstances, I would sit tight and await developments.

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