Business Plan

Based on the above-mentioned levers imposed by Blackstone in their transformation of Hilton and past information provided in the strategic and financial analyses, we will in the following sections outline the business plan. The reader should be aware that we have identified these measures given the publicly available information, making it important to bear in mind that companies rarely disclose their weaknesses.

In reality, PE companies conduct due diligence analyses about their target firm based on information that is often not disclosed to the public and they are therefore in a better position to form a concrete business plan. With that said, we believe that there is more room for improvement in the case of Rezidor than presented in our business plan, and we therefore have a more conservative forecast than what possibly would be the case in reality.

81 7.2.1 Financial Engineering

Increased tax shield. Financial engineering will serve as a key value creator in the LBO by optimizing Rezidor’s financial structure. As addressed in section 6.3.5, Rezidor has historically maintained lower levels of leverage compared to peers. This has resulted in higher tax payments than what could be deemed optimal. By increasing the amount of debt on Rezidor’s balance sheet, associated interest payments would yield significant tax shield advantages. Thus post the LBO, Rezidor will pay much less tax than it would have otherwise amplified by the debt increase.

7.2.2 Governance Engineering

Optimize board composition and executive compensation. Looking at the current management of Rezidor, it is clear that the company has very close ties to its owner, Carlson Group. In the Rezidor’s current board of directors, four out of nine board members have a background in Carlson, whereas two out of seven in the executive board are former Carlson employees, including the CEO Wolfgang Neumann. Given this close connection to the owners, one can ask if it has affected the outcome of the negotiation of the franchise agreement concerning the EMEA user rights of Carlson’s brands.

Above that, the composition of the board of directors as well as the executive committee seems to be well balanced, considering the diversity and expertise. However, even though Rezidor on paper seems to in good hands, we believe that the imposition of an LBO transaction requires a change of management. The Hilton example showed that it is not only important to recruit people that are experienced with LBO transactions, but also people that are known for being tough negotiators. This was the case of Jonathan Gray, who successfully renegotiated the terms of the loans. Another fresh breeze to Hilton’s management was Christopher Nasetta, who was known for being an expert in restructuring companies and took on his role as CEO by implementing new ideas that proved to be vital for Hilton’s success. This is a major advantage with changing leadership, as new leaders are better suited for viewing the company objectively and questioning old structures.

Last, we believe that the very nature of a leveraged buyout itself will discipline management, as they have to be committed to pay the fixed interest payments and amortizations of the loans.

Failure to meet the debt obligations will not only leave the company bankrupt, but also make the management unemployed.

82 7.2.3 Operational Engineering

Expansion in Sub-Saharan Africa primarily in the upper midscale segment. Rezidor has for many years been a large player in the Middle East and Africa region, realizing a successful expansion with its upscale brand Radisson Blu. Rezidor has however showed little interest in establishing its second largest brand, Park Inn by Radisson, which operates in the midscale segment. We believe, for several reasons, that the time is now right to scale up its presence in the mid-scale market: First, the African middle class is growing at fast speed. Second, African economies are growing and becoming more diversified, fuelling intra-African trade activity. Third, as long-distance flights are becoming cheaper thanks to low fuel prices, there is a chance that tourism demand will surge in countries south of Sahara. Fourth, today’s tourists to Sub-Saharan countries have few other options but to choose expensive upscale hotels. Fifth, hotel supply is low and there exist substantial barriers of entry. Last, Rezidor is well-established in Sub-Sahara having a sales office in South Africa and a strategic advantage thanks to the partnership with Afrinord.

Expansion of Radisson Red hotels. The global hotel industry is currently experiencing a shift in consumer preferences. By 2020, we can expect that so called Millennial Travelers will account for half of the global hotel demand, putting pressure on hotel operators to meet the demand. To be ready for this shift, Rezidor has recently launched a new brand, Radisson Red for which it plans to open 60 new hotels before 2020. We welcome these expansion plans, as we find it highly important to become an early mover for this customer segment.

Accelerate the rebalancing of Rezidor’s business model. During the last couple of years, Rezidor has been phasing out leased properties and instead introduced more franchised and managed hotels. Through the launch of Rezidor’s strategic program Route 2015, Rezidor increased the proportions of managed and franchised hotels in their hotel portfolio and was accordingly able to achieve an increased EBITDA margin of 7.7% between 2011 and 2015. As suggested by its peers, a lower share of leased hotels not only improves profitability, but also allows for significant decreases in capex. Under the influence of Blackstone, Hilton undertook a similar rebalance of its hotel portfolio, leading to a reduction of the share of leased hotels from 13.5%

to 9.4% over a 6-year period. This decrease yielded significant cuts in capex and helped increasing the cash flow from operations five times over between 2008 and 2012. Thanks to Route 2015, Rezidor has come a long way in the transformation of its business model. However, compared to the peers which are also pursuing similar asset light strategies, Rezidor’s share of 20% leased hotels is today still by far the highest. (Appendix G).

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Rezidor has still not communicated a plan past Route 2015. Thus, we believe that substantial value can be added by introducing a new program which emphasizes accelerating the rebalancing of Rezidor’s business model. Today, Rezidor’s pipeline is solely composed of management and franchising contracts, representing 86% and 14% respectively. Under our ownership, we intend to keep prioritizing managed to franchised hotels as well as to stop investing in leased hotels. The reason why we prefer managed over franchised hotels is twofold.

First, there are higher EBITDA-margins to achieve with managed hotels than with franchised.

Second, as opposed to franchise agreements, management contracts imply that we are in full control of the operation of our hotel portfolio. This means that we are with management contracts in a much better position to guarantee first-class service, which is not the case with franchise agreements. Franchised hotels are operated by third parties, which entails a risk that the operator reduces the quality of its services to save money, but still enjoys the excellent reputation that comes with Rezidor’s brands.

Hence, our ambition is keep focusing on an asset light strategy, by maintaining the current hotel pipeline, emphasizing on primarily managed hotels and to a lesser extent franchised. As for our leased hotels, our plan is to stop signing new leasing agreements, but to keep profitable hotels as they are and terminate or renegotiate terms for the unprofitable leased hotels. Specifically, Rezidor should terminate or renegotiate leased hotel contracts in the rest of Western Europe region, while keeping the profitable contracts that are situated in more favorable locations, primarily in the Nordic region.

Improved loyalty program. Customer loyalty has become increasingly important in the last years. We have seen in the case of Hilton that members of the loyalty programs are considerably more profitable customers than non-members. Binding customers closer to the company through loyalty programs is also a way of battling the threat Airbnb and the sharing economy. If customers feel that they are being rewarded for their loyalty, they are less likely to look for cheaper alternatives. As tourism demand in mature hotel markets is growing at a slower pace, much of an individual company’s growth is determined by its ability to retain customers and to increase spending per customer.

Rezidor’s loyalty program Club Carlson has grown at an impressive rate of 13% per year between 2007 and 2013. Nevertheless, compared to its peers, this is just an average growth rate. In terms of customer satisfaction, Club Carlson is also just an average loyalty program, representing only 15% of Rezidor’s occupancy. (Rezidor, 2013b) Hilton on the other hand, as

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described in section 7.1.3 has accomplished a formidable transformation of Hilton Honors, accounting for 50% of Hilton’s occupancy.

By learning from Hilton Honors and implementing some of its key benefits, we believe that Rezidor would be able to grow occupancy similar to that of Hilton. One aspect that makes Hilton Honors attractive is its ease of redeeming points - it for instance entirely lacks blackout dates.¹¹ (J.D. Power, 2015) In contrast, Club Carlson members are only allowed to choose from eligible dates to redeem their points and member benefits are not available in all of Carlson Rezidor’s hotels. Another aspect that could make the Club Carlson more attractive is its network of hotels and partners. As we outlined before, we plan to grow our hotel portfolio significantly in the Africa and Middle East Region, where tourism has grown substantially in recent years and is still for many western citizens an undiscovered destination. By adding exciting locations to the hotel portfolio, we would in addition improve the value proposition of our loyalty program.

Similarly, by adding new and exciting partnerships to the program would enhance the customer’s propensity to choose our loyalty program rather than the competitor’s.