COMMENT: The mergers & acquisition landscape in the Middle East

The costs and benefits to owners of mega-mergers

Opinion, Columnists, Acquisitions

In the aftermath of Marriott’s largest-ever acquisition, in which it acquired Starwood Hotels, some key players in the hotel industry may wish to consider the implications of this new trend of consolidation.

Generally, it has been considered that the increased trend in mergers and acquisitions in the hotel sector puts investors/owners on the back foot as operators gain more market share (resulting from a decrease in competition) and owners, correspondingly, lose leverage. However, owners may be able to capitalise on this. Where two brands merge, this can result in increased economies of scale, the benefits of which can manifest themselves in a number of ways. Perhaps the most obvious of these is the gained access to a larger customer base. In particular, where a merger or acquisition brings about a merged loyalty programme, travellers can enjoy access to a wider selection of hotels which subsequently creates value that owners can benefit from.

Typically, the operator’s standard hotel agreements do not include restrictions on any ‘change of control’ of the operator. When negotiating the agreements, owners may seek to restrict the operator change of control provisions, so that any change is subject to the prior consent of the owner.

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Mergers between hotel operators could also mean greater competition for owners. Whilst the operator itself may benefit from economies of scale, the competition with neighbouring hotels may change dramatically — to be competitors of hotels that are now managed by the same operator. This could have a positive impact (which we have seen to be the case both in terms of revenue management and increased bargaining strength against third party suppliers) but equally, depending on the circumstances, could negatively impact the cost and operations of the hotel.

Mergers and acquisitions can also bring about unexpected costs for the owner. For example, the requirement to update the hotel to reflect any new brand standard guidelines following the merger may be a concern. Usually, the operator’s standard position under its template agreements will not provide the owner with any control or material rights in this situation and the owner would be required to undertake any works/system upgrades that may be required by the operator’s brand standards (at the cost of the owner). It is imperative, therefore, that during any negotiations, the owner bears this in mind and seeks to protect its position in such circumstances. One example would be agreeing to a freeze period during the term of the hotel agreement, where the owner will not be required to make any changes to comply with any updated brand standards.

Another example that we have seen is that such a brand standardisation may involve considerable IT systems conversions and unification of IT standards. Whilst it appears obvious that these are vital issues that should be addressed, these should be considered carefully at the time the hotel agreements are negotiated, so as to avoid operators using this as an opportunity to try and pass on the cost of services that are outside the remit of any mandatory brand implementation to the owner.

Owners should seek to negotiate that any such additional costs that relate to or arise as a result of the merger (i.e., that are outside the remit of any mandatory brand implementation) should be absorbed by the acquirer as part of the cost of the acquisition.

Of course, there is the possibility that such a change could bring about opportunities to increase revenue, for instance, through allowing the hotel to conquer a new customer base in the market. Nevertheless, it should be considered that this change in branding may come at an expense to the owner and may not, necessarily, be fruitful for the bottom line.

Going forward, hotel owners should bear in mind that the recent mergers are expected to be just the tip of the iceberg. Owners should consider their position in the event of a merger or acquisition when negotiating hotel management agreements in the future. Whilst it appears that there could be much to gain by way of obtaining access to a bigger market share, owners should be wary and should ensure that they retain some level of control and oversight and, moreover, seek to gain contractual protections against merger costs unrelated to the operation of the hotel.

About the Author: Keri Watkins is senior associate, real estate practice, at Baker McKenzie Habib Al Mulla, UAE. She is a UK-qualified lawyer who has been working in the Middle East since November 2007 and has extensive real estate, development and hotel related experience. Watkins provides advice to clients across the Middle East and has also worked on a number of matters in Africa. During her time in the United Arab Emirates, Watkins has spent time on secondment with Dubai Properties Group and Sowwah Square Investments LLC. Contact her via +971 4 423 0092 or www.bakermckenzie.com.

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