Barcelo's Spanish hotel merger bid for NH synches with Chinese HNA troubles

Adam Tan Xiangdong, CEO/co-Founder at HNA Group © NIU BO / IMAGINECHINA

The sharp rise in tourism to Spain that has brought at least two REITs and numerous funds surging into its hotel sector has sparked a merger offer by Mallorca-based Barcelo for NH Hotels that would create Europe's third largest hospitality group. The timing is well chosen: NH's 29.5 % shareholder is China's HNA which is being urged by Beijing to relinquish overseas holdings.

Barcelo, a family-owned group that has a close cooperation with REIT/SOCIMI Hispania Activos Inmobiliarios, aims with the merger to create a hotel colossus with over 600 hotels and 109,000 rooms in Europe, the US and South America. It is offering an equity swap that values NH at €2.48bn - a share price bid of €7.08 that represents a premium of 27 % over the three-month average to 30 October. Lodged with Spanish stock market regulator CNMV at the end of last month, the proposal is for Barcelo to take 60% of the merged group. If it goes ahead, the merger would create the largest Spanish hotel group, ahead of Melia with 375 hotels and 96,369 rooms, and also the third biggest in Europe behind the UK's InterContintental and Paris-based Accor.

Barcelo Co-President Simon Pedro Barcelo said the move stems from, “the great strategic sense and exceptional potential for creation of value for the shareholders of both companies.” He also offered to locate the merged group's HQ in Madrid rather than his native Mallorca. “Our intention is to integrate all of the assets and liabilities of Grupo Barcelo, including our Hotel and Travel divisions which we believe could contribute value to the combined group," Barcelo said. "Nevertheless, we are willing to consider different alternatives regarding the perimeter of the assets and liabilities in order to facilitate the success of the transaction.”

In fact, the Spanish hotel sector is experiencing a kind of 'gold rush'. The main spark for this are terror attacks in north Africa and elsewhere that have made European tourists nervous of travelling outside the continent. Turkey, long a favoured destination for northern European and Russian mass tourism, is now also firmly off the tourist map after the sudden rise in animosity toward foreigners - including jailings - by President Recep Tayyip Erdoğan.

Hispania has been an early mover in the Spanish hotel 'rush'. Working closely with Barcelo it is pushing hard to transform itself quickly into a pure-play resort hotel specialist. Moving quickly up behind are Blackstone and France's premier real estate entrepreneurial dynasty the Ruggieri family. In August its Batipart holding purchased an unlisted Spanish REIT/SOCIMI from French REIT/SIIC Eurosic - a company the family sold earlier this year to Gecina - aiming squarely at the Iberian hotel sector. Batipart renamed this vehicle Elaia Investment Spain and aims to float it soon.

Deloitte Espana reported recently that the surge of international capital into Spanish hotel portfolios year to date has reached €2.6bn, 21% higher than all of 2016 and nearing 2015's record €2.7bn. The main operations include the purchase by Blackstone of the HI Partners hotel portfolio from Sabadell for €630m, and by the UK's London & Regional of four Starmel hotels for €230m. These have been accompanied by one-off hotel transactions including Madrid's 'white elephant' Edificio España by RIU in June for €272m, plus noteworthy acquisitions by UK fund Benson Elliot and AXA IM Real Assets.

And NH? Its main shareholders are, to say the least, disunited. After HNA comes the London-based fund Oceanwood with 12% stake and, at 9%, the private Spanish hotel operator Hesperia which is, continually it seems, at loggerheads with NH management. Its owner is also struggling with high debts, making the Barcelo offer both timely and attractive.

But it is the Chinese conglomerate HNA, with a 29.5% NH stake, that is under most pressure. After numerous acquisitions in Europe and elsewhere in recent years, it may have to divest many of them after Beijing, worried that too much capital is leaving the country, issued a notice in June requiring cutbacks. HNA's most high profile stakes include ownership of the Carlson Rezidor Hotel Group, taken last year, a 25% holding in Hilton Worldwide, stakes in Swissport, Ingram Micro and CWT - and a 9.9% equity position in Germany's Deutsche Bank. The latter is just now coming under the intense spotlight of the country's BAFIN regulator, which suspects irregularities.

The Hotel Management portal reports that HNA has now agreed to drop out of any agreements blacklisted by the Chinese government. Even though NH is not on this list as yet, the portal reports that HNA CEO Adam Tan Xiangdong announced recently that the group will "listen to orders" and "not invest a cent in areas forbidden by the government." It will pull out of projects it has started and sell direct real estate. HNA's troubles should play well into Barcelo's game plan. We will know, at the latest, early in the New Year.