About to buy a package of fancy hotels? Best to find someone to run them. Over the weekend, news broke that Chinese insurance group turned property titan Anbang was to acquire Strategic Hotels & Resorts, the owner of 16 luxury properties, for $6.5bn. That transaction, yet to be formally announced, comes just three months after Strategic had been bought by the Blackstone Group for $6bn. If Blackstone had funded this with one-third equity, its annualised return on the buyout would be 100 per cent.
Then yesterday, Starwood Hotels & Resorts announced that a new party (later identified as an investor group led by Anbang) had expressed interest in buying it, despite an already announced deal to be acquired by rival Marriott International. Starwood, known for its Westin, Sheraton, St Regis and W brands, operates under a very different strategy to Strategic. It owns fewer and fewer of the hotels that bear its brand names.
The big US hotel groups — Starwood, Marriott, Hilton — decided some time ago that their most prized asset was not land but their brands and operating expertise. By selling off hotel properties and then charging fees to manage them (Strategic even has a property managed by Starwood’s Westin), these groups have vastly simplified their balance sheets and improved returns on capital. Strategic played to its own strengths; before the Blackstone buyout, it was structured as a Reit. It paid out most of its cash flow as dividends, avoided corporate taxes and enjoyed a low cost of capital.