Check in for the hotel boom

British and foreign groups are queuing up to boost their stakes in the UK sector, writes Laura Board

BRITISH hotels have become as sought after as tickets for the World Cup finals. In the space of a week, Thistle Hotels, the UK's third largest hotel operator worth perhaps pounds 1.5bn, said it may be taken over. Vaux Group, ranked 12th, raised then crushed the prospect of an offer. Cliveden is also in takeover talks, and just two months ago Blackstone Group snapped up Savoy.

Large hotel operators have gobbled up rivals in other parts of the world, though rising room rates give the UK a special allure. Not only are British companies like Stakis stocking up on sites - outsiders are testing the waters.

"There's an awful lot of American money looking outside for returns and Europe is particularly attractive," said Neville Pike, a partner in consultancy Arthur Andersen's hospitality and leisure division. "The operating performance of UK hotels is as good as it gets. In London, you can virtually open the doors and the guests will come in."

The UK's pounds 8.8bn hotel industry is both booming and fragmented. Most analysts expect room rates to rise this year and next, unabashed by six increases in interest rates. The market is split between 10,600 hotels, of which 84 per cent have annual sales of less than pounds 499,000, according to research group Mintel.

There is another reason the UK appeals - its service sector workers are among the lowest paid in Europe and regulation is slack. "Labour laws are more flexible and add-on labour costs are lower" than elsewhere in Europe, said Mr Pike.

American real estate investment trusts (Reits), facing slim opportunity and inflated property prices at home, are on the offensive. Patriot American Hospitality in January bought Arcadian International, the owner of Malmaison hotels, and is tipped to make further acquisitions. Starwood Hotels & Resorts Trust, victor in the battle for Sheraton owner ITT Corp, is also seen as a UK contender, though both have said they're not interested in Thistle Hotels. The two companies are paired-share Reits, comprising a Reit and a normal operating company, which stand to lose tax benefits on US acquisitions under new legislation.

Analysts said consolidation could begin with regional UK hotel chains as up-and-coming operators like Stakis - Vaux's one-time suitor according to some analysts - stock up on sites. Vaux said on Friday it had ended discussions with a potential buyer after preliminary talks.

"There must be other people looking at Vaux," said Alan Gray, an analyst at Sutherlands in Edinburgh. "There's no guarantee it will be bought but I wouldn't rule it out."

The UK's largest companies are generally tied up with other projects or looking elsewhere. "What they would love is to buy individual hotels, or take half a dozen from a chain," said Bruce Jones, an analyst at Merrill Lynch.

For example, the UK's number one operator, Granada Group, denied any interest in Thistle Hotels and is seen as unlikely to make big acquisitions while it digests Forte. Bass and Ladbroke Group, the owners of Intercontinental and Hilton International respectively, have their sights set on emerging markets. Second-ranked Whitbread is unusual in being UK-focused and is looking to expand its budget operation Travel Inn and its Marriott chain.

The most sought-after UK hotels are four-stars located in London. Four- star hotels allow companies to charge more, and London is bouncing back from overcapacity. Mr Jones expects London rates to rise in the "high single figures" this year and by 5 or 6 per cent next year, compared with a forecast 7.5 per cent increase outside London, slowing to 3.5 or 4 per cent in 1999.

That's partly what has lured buyers to Thistle. Half its 12,993 rooms are in London and two-thirds of its 91 hotels are four-star.

Larger operators are hunting for companies where they can boost "room yield" - a function of occupancy levels and room rates - by using state- of-the art systems to sell more rooms to lucrative business customers.

"All the major hotels are focusing on yield management," said Iain Wilkie, a partner at Ernst & Young's hospitality and leisure division. "They have become a lot more sophisticated in managing room flows."

Acquisitions instantly improve hotels' purchasing power, and hooking up new companies to central reservation systems generates more savings. Those that go a step further and brand properties, reassuring customers that service in Barnsley will equal that in Bournemouth, are better placed still.

Mergers and acquisitions need not dent earnings for remaining players as it is likely to push rates up even higher, although suppliers will feel the pinch. A 27 per cent rise in the leisure section of the FT-SE 350 in the past six months suggests investors are optimistic. There seems little to prevent the hotels sector becoming a market favourite.

Copyright: IOS & Bloomberg