The more cash that builds up in a business, the more likely it is to go down the drain. French hotel group Accor is putting this principle — dubbed the bladder theory of corporate finance by a celebrated fund manager — to the test. After a recent €4.4bn property sale, Accor’s ambitious ex-banker boss can afford to spend heftily. But his latest acquisition should calm any fears about reckless dealmaking.
The acquisition of Mövenpick Hotels & Resorts from Saudi Arabia’s Kingdom Holding Company for €482m in cash is a sensible deal. It is another step in Accor’s move away from its roots as budget hotel operator. After previous swanky acquisitions such as London’s Savoy, luxury hotels will account for about 45 per cent of revenues, an increase of about 4 points.
Mövenpick — improbably named by its Swiss founder after a seagull on Lake Zurich — is in good shape. It has tripled in size in the two decades it was owned by the investment vehicle of tycoon Prince Alwaleed bin Talal, sometimes known as the “Warren Buffett of Arabia”.
Even so, Accor should be able to improve Mövenpick’s operations. Better distribution and loyalty schemes should boost profits. Cost savings will come from cutting overheads and improving procurement. The deal values Mövenpick at about 15 times estimated 2019 operating profits before usual deductions. That is in line with industry norms. Taking account of annual synergies expected to total €18m of these adjusted operating profits, the cost of the transaction would drop to 10 times.
Sébastien Bazin has made €7bn of deals since taking over as chief executive. He plans to concentrate on smaller, bolt-on deals, while strengthening the balance sheet and buying back shares. Accor’s shares have risen 10 per cent in the past year, while the Stoxx travel and leisure index has fallen by a similar amount. If he can go on making good use of cash, investors will continue to check in, not out.