The Westin Paris – Vendôme, Hotels M&A in Western Europe? The glass is half fullBy Robert Cole | March 28, 2023Share There is M&A happening at the top end and in the budget arena, but it’s much harder for mid-market assets. There is M&A activity on the European hotel scene. That much is obvious from the freshly updated list of deals prepared by Hilltop Hospitality Advisors, the London-based consultancy. Year to date, Tom Oakden, Hilltop’s CEO, lists 84 deals of various kinds, including offers, sales, and refinancings.Among the eye-catchers is Dubai Holding’s deal to take full ownership of The Westin Paris – Vendôme, giving an implied value for the hotel of €650 million ($700 million). The Gulf investment conglomerate describes the 400-room property as being “in the heart of the busiest luxury district in Paris... overlooking the Jardin des Tuileries, the River Seine and the Eiffel Tower.”Tom Oakden reminds us that TPG, the private equity investor, is preparing for the sale of the A&O hostel business, which includes 39 assets (13 owned, 26 leased) with 28,500 beds. “The core location is Germany with 25 hostels,” Oakden writes, which “TPG acquired in 2017 for €250 million, when the business included 31 hostels which were predominantly leased.” Still at the pre-sale stage, Hilltop says the pricing range is estimated to be €800 million to €1 billion ($860 million to $1.1 billion).Generator, another hostel operators, and RF Hotels (as in Rocco Forte) are two other recent additions to Hilltop’s handy checklist.Frustrations for leveraged buyersOakden said that equity buyers are dominating the hotel investment market while “frustrations grow for leveraged buyers unable to meet sellers’ prices.”Tom Oakden“Meanwhile,” he added, “highly traded markets this year have been Spain and Italy with the best assets in the best cities or resorts achieving robust pricing from long-term capital or owner operators.”This assessment, which may be aptly described as ‘glass half full, rather than glass half empty’ is echoed by Ascan Kókai, head of hotels for ECE Real Estate Partners, the Hamburg-based firm with more than €5 billion ($5.4 billion) under management. “Transaction volume is somewhat muted thanks to the sharp increase in interest rates over the last six to eight months,” he said.Hopes for a strong second half of 2022 were dashed as investors adopted a wait-and-see approach, Kókai said. There are still plenty of projects in the pipeline, he added, but we are in “holding pattern mode.”Kókai added that M&A is not completely dead but compared to the capital available, especially out of the private equity space, there is relatively limited activity.“Sellers,” he said, “are still looking to 2019 valuations… the changed interest rate environment means asking prices have to come down.”Ascan KókaiBy how much? Some kinds of assets, Kókai said, notably at the luxury end, are enjoying sustained valuations or even climbs. As a broad observation, though, he said prices need to come down by up to 20%.The big factor is interest ratesAn intricate set of competing forces is exerting finely balanced pressures on hotels M&A in Western Europe. The big factor is interest rates and while the uncertainty is negative overall, there are positives.Concerted rate-raising policies from central bank are making life hardest for those who have bank debt or would like to re-finance. Floating rate debt costs more while borrowers with maturing fixed-rate facilities have faced, or will face, expensive wake-up calls.Higher rates spell double trouble because of the effect on bank balance sheets. Higher rates alter the book value of banks’ capital buffers thereby impeding their willingness to lend. As some older debts are written down or written off because borrowers can’t afford the new financing climate, banks’ approach to deals becomes more cautious still. As circles go, that’s pretty vicious.Conversely, higher rates are feeding enthusiasm elsewhere. Providers of private credit – fellow travelers of private equity – have few, if any, bank-style systemic risks to manage and that frees the hands on these financial levers. It helps that bank debt alternatives are harder to come by, of course, while rising rates make the returns, at least in nominal terms, more attractive.As for the equity piece, it appears that the appetite among owners of traditional publicly quoted M&A is thin. Short-term operating uncertainties coupled with short-term investment horizons makes hotel real estate a hard sell for many of the owners of FTSE, CAC, Dax and other euro-markets.Sellers are still looking to 2019 valuations… the changed interest rate environment means asking prices have to come down.Ascan KókaiShare this quoteIt’s a different story for sovereign wealth, family offices, and pension and endowment funds delegated to closed private equity style managers. Cash buyers with investment horizons that see through economic cycles have come to see hotel assets as relatively dependable. Gone are the days when hotels were seen as cap-ex hungry, op-ex risky, and worryingly exposed to fickle business and consumer tastes.Investor confidenceHotels are still cyclical, still with operating cost risks, make-or-break consumer judgements rapidly conveyed over social media channels, and macro-economics, but they seem to enjoy investor confidence of a sort which once, say 20 years ago, seemed impossibly out of reach.The biggest challenges are in the middle ground. As the Hilltop listed examples above suggest, there is M&A happening at the top end and in the budget arena. It’s much harder for mid-market assets.Two years ago, with rates near zero, survival was a question of operational stamina. Now, financing costs means that however patient, however determined, at least some of the mid-market players may find themselves selling their way round rising interest rates.