China’s Huazhu Hotels Buys German Hospitality Group for $802M

In a sign of how life may be changing for global plutocrats, the next World Economic Forum in Davos may be held at a Chinese budget hotel. Or at least at a property owned and managed by China’s Huazhu Hotels Group, the country’s biggest owner of cheap hostelries

Huazhu, which has grown from a single Hanting hotel in 2005 into the world’s fifth largest hotel group by market capitalization, announced on Monday that a subsidiary of the company has agreed to buy one of Germany’s best-known luxury hotel chains for around $802 million.

The purchase of Frankfurt-based Deutsche Hospitality, which through its Steigenberger Hotels and Resorts brand operates the Grand Belvedere in Davos, Switzerland which traditionally serves as the main venue for the annual World Economic Forum, was revealed one month after NASDAQ-listed Huazhu opened its first overseas hotel in Singapore.

Huazhu, which now owns or manages more than 5,151 hotels, said in a statement that it is buying Deutsche Hospitality from Egyptian travel and tourism company Travco Group to further accelerate the pace of its overseas expansion, while also eyeing opportunities to bring Deutsche’s brands to China.

Bringing Chinese Brands to Europe, and German Brands to the Mainland

“This acquisition is an important milestone in our global growth strategy,” Huazhu founder and executive chairman Ji Qi said in a statement. “Deutsche Hospitality is a perfect strategic fit and we expect competitive advantages for both companies. The brands of Deutsche Hospitality will enhance the offering of Huazhu and its operating capabilities in the high-end European hotel market.”

The 90-year-old German hospitality group operates 118 hotels in 19 countries and has 36 hotels under development, with a focus in Germany, Denmark, Austria, Spain, Egypt and the United Arab Emirates.

Deutsche Hospitality said it has plans to increase the number of hotels in its portfolio to 250 by 2024. Huazhu, which in May teamed up with investment giant China Everbright’s real estate investment arm to launch a hotel and residential focused private equity investment fund, said it will help Deutsche Hospitality expand into the Asia market, including China.

Huazhu’s acquisition values Deutsche Hospitality, whose brands include MAXX by Steigenberger, Jaz in the City, IntercityHotels and Zleep at 17-18 times its 2019 expected earnings before interest, tax, depreciation and amortization or at less than 10 times expected 2022 core earnings.

The acquisition is subject to regulatory approvals and will likely close at the start of 2020, according to the statement.

Expanding China’s Biggest Hotel Portfolio

Founded in 2005, Huazhu is known for its network of economy hotel chains in China including HanTing, Joya, Starway and Orange Hotel, as well as its set of Ibis hotels which is operates under an agreement with France’s Accor.

Bringing Deutsche Hospitality’s international hotel brands into the Chinese market will further enrich Huazhu’s high-end product line, said Huazhu’s Ji told China’s local media. A former executive and co-founder of China online travel pioneer Ctrip, Ji’s hotel group currently ranks fifth in the world by market capitalisation behind Marriott, Hilton, Accor and InterContinental Hotels Group and currently operates in over 400 cities, with another 1,736 hotels in its pipeline, according to the company.

In its announcement, Huazhu did not disclose how it plans to fund the acquisition of Deutsche Hospitality. As of 30 June, Huazhu had RMB 4.1 billion ($590 million) of cash on hand and RMB 9.2 billion of outstanding debt, according to its mid-year financial report. The hotel operator also had RMB 3.2 billion of funding available through an untapped credit facility, according to Chinese business website Caixin.

Aiming to Make It in New York

After making its overseas debut in Singapore last month, Huazhu, which was previously known as China Lodging Group, plans to keep going international by opening four hotels in New York next year. In announcing the Deutsche acquisition Huazhu said it will continue to accelerate the pace of its overseas expansion, and will consider opportunities in the middle and high-end hotel segments that meet its strategic requirements.

Fifty-three year old Ji holds a 37 percent stake in Huazhu to rank as the company’s single largest shareholder. French hospitality giant Accor owns a 10.5 percent interest in the firm, with Huazhu owns 4.9 percent stake in the French group. Ctrip-backed online travel agency Trip.com also holds a 7.8 percent interest in Huazhu.

The group’s business includes leased, owned, and franchised models, as well as properties both franchised and managed by Huazhu, under what the Shanghai-based firm refers to as its “manachised” approach. As of September 30, Huazhu operates 17 percent of its hotel rooms under a lease and ownership model, and 83 percent under manachise and franchise models.

In the second quarter the company reported profit of 605 million — an 81 percent jump compared to the same period last year — based on revenue of RMB 2.86 billion, which grew 13.4 percent from a year ago. Huazhu is scheduled to report third-quarter earnings next Tuesday and estimates that net revenue will have increased by 10 to 11 percent compared to the July through September period of 2018.