Exit Considerations

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Exhibit 57. Sensitivity Analysis of EBITDA Margin Assumptions

Source: Own creation

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signals that the firm believes in the prospects of its LBO target. An obvious risk in that case would be that we would face a trade restriction, preventing us from selling additional shares for a period of 6 to 12 months following the IPO.²⁵ (Povaly, 2007 p.122) This leaves us with an additional risk as we during this period would have to bear market risk. This risk exposure could on the other hand yield benefits if the stock price would increase post the IPO. Referring to the Hilton transaction, Blackstone retained a 67% ownership after the IPO and managed to get a 26% higher return from selling shares after the expiration of the lock-up period. (Dulaney, 2014)

Assessing the sentiment of the IPO market, we would focus on the development of the major European stock market indices, such as the Euro STOXX 50 and the OMX S30. We would further analyse the development of government bond yields and the level of the volatility index, VIX.

Ideally, stock markets would indicate stability and increasing trends whereas bond yields would remain low forcing investors to allocate funds into equities. VIX, which corresponds to the implied volatility on the S&P 500 index options is a measure of investors’ expectations about future volatility in the market. Generally, a level below 20 is considered a sign of a calm market, while a level above 30 implies uncertainty (Investopedia, 2003a). A low level in the VIX index is essential when pursuing an IPO as investors generally revert to safer investments in disturbed market periods.

We would thereafter consider the IPO activity and performance of the prevailing IPO market.

As Rezidor has a history of being a Scandinavian hotel operator and has always been based in Sweden, where most of its labour force is located, we would be likely to proceed with a listing on the OMX Stockholm stock exchange.

Specifically, we would expect to list Rezidor on the OMX midcap cap list as the estimated equity value at exit remains below a billion euro (Nasdaq, 2012). As a result, we would primarily focus on the development and pipeline of IPO’s in the Nordic region. All else being equal, a high IPO pipeline is a clear attractive aspect for such a route of exit. An overview of the development in the number of IPO’s in the European and the Nordic region between 2000 and 2015 is displayed below, exhibit 58 and 59.

25 Such lock up periods are imposed on firms that have decided to divest less than 100% of their shares in order to prevent the company from selling shares too quickly after a company goes public. A company trying to unload the remaining part of their shares in the first week of trading could send the stock downward, to the detriment of all shareholders.

114 Exhibit 58. European IPO’s 2000-2015

Source: Thomson Reuters (2016), Own creation

Exhibit 59. Nordic IPO’s 2000-2015

Source: Thomson Reuters (2016), Own creation

As portrayed by the graphs, the number of IPOs varies relatively much from year to year as an effect of external shocks caused by changes in the economic sentiment. For instance, during the financial crisis of 2008 the number of IPOs declined radically as an effect of plunging stock markets and increased volatility. In 2012, the market for IPOs deteriorated due to concerns about the global economy and the European debt crisis which caused increased volatility and falling stock prices as investors reverted to safe have assets such as gold. (Stewart et al, 2012) A lead investment bank would be hired in order to assist in determining the market sentiment, coordinating the process and build the book ahead of the day of listing. In building the book, which is a procedure of determining a suitable listing price considering the demand from institutional investors (Investopedia, 2003b) we would stress the importance of attracting reputable investment and pension funds to commit to acquiring shares in the IPO. This would help in portraying Rezidor as an attractive investment being sought after by professional investors. In combination with offering an appropriate discount, we would thereby increase the chance of the issue being oversubscribed and the execution of a successful IPO exit.

In IPO’s, discounts are typically offered in order to attract attention and increase the appetite from investors. The size of the discount would be decided upon recent discount levels in Nordic IPO’s, but also taking the requirements from cornerstone investors into account. Bodnaruk et al.

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(2007) found that the average discount from 124 IPOs in Sweden between 1995 and 2001 was 14.2%. (Bodnaruk et al, 2007). As a reference to the hotel industry, Blackstone offered a discount of 7.5% for selling Hilton, which lead to the stock being oversubscribed. (Dulaney, 2014)

9.6.2 Strategic Sale

As opposed to the exit through an IPO, a strategic sale usually involves a full exit i.e. we would sell 100% of Rezidor. In addition, a strategic sale would imply a faster exit route, eliminating the market exposure that PE firms face when deciding to sell remaining blocks of shares at a later point after the IPO. The strategic sale is also less sensible to the state of the overall economic activity than the IPO as the selling price is more dependent on the synergies that the specific buyer would get from combining activities. Nevertheless, as stock prices in the hotel industry are affected by the market demand for hotel services, which in turn is driven by the overall economic activity, there is a certain aspect of timing to the exit of a strategic sale as well.

A common strategic sale process contains four stages, in the first, the PE company determines a fair value of the company it intends to sell. In the second stage, potential buyers are identified, contacted and provided information memoranda. Stage three is where a company informs the PE fund of their interest and makes an indicative offer. In stage four, a complete due diligence is carried out and negotiations between the potential acquirer and the PE fund take place, before agreeing to a purchase price (McDonald & Lam, 2014). During this stage, PE fund provides the potential acquirer with confidential information, which involves sensitive financials and future forecasts. Sharing this information implies a risk for the PE firm, given that there is a risk that the transaction will not be completed. However, it is in the PE firm’s interest to help reduce the information asymmetry faced by the buyer. (ibid, 2014)

Now, as we have already determined the selling price of Rezidor, corresponding to EV/EBITDA 7.6x, we have completed the first stage of the sale process. In the remaining part of this section we will discuss who the potential buyers could be. As we described in section 4.5.2, merger activity in the hotel industry has been rising in the recent past. Acquiring hotel companies are seeking the value of diversification of their brand segments and geographic operations as well improving the value proposition of their loyalty program by expanding their hotel network. For instance, addressing the rationale behind the acquisition of Starwood, Marriott’s CEO Arne Sorenson claimed that “this greater scale should offer a wider choice of brands to consumers.”

Loyalty programs become increasingly important as members spend more and stay more

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frequently than non-members. As earlier noted, what makes a loyalty program attractive is predominantly their geographic spread, which appeals to both business and leisure customers.

For these reasons, we concentrate this buyer selection process on competitors that have low presence in Rezidor’s markets and brand segments.

At present, there is no obvious buyer among the peer group. Although being less present in Africa, the British market leader IHG has already a considerable hotel portfolio in Europe in the same segments as Rezidor’s dominant brands, Radisson Blu and Park Inn. Hilton is also well established in the EMEA region, having for many years pursued an aggressive international expansion under the ownership of Blackstone. In terms of its brand portfolio, it is also very similar to Rezidor. The same holds for the two remaining companies, Marriott and Starwood, who will soon combine their forces and become the world’s largest hotel company. As Starwood today has a very diversified hotel portfolio, we believe that Marriott would be satisfied with its combined portfolio. Thus, we believe that other players among the top 10 largest hotel companies would be more willing to buy Rezidor.

The world’s fourth largest hotel company Wyndham seems to fit into the above mentioned criteria. In the past 5 years, it has been growing at a slower pace than its top competitors and has a relatively homogenous brand portfolio, mostly serving the economy and midscale segments (Wyndham, 2014). Rezidor, being strong in the upper upscale segment as well as in the upper midscale segment would be a good fit in this respect. In addition, hotel rooms located in Europe, Middle East and Africa only account for 8% of Wyndham’s total portfolio, meaning that Wyndham would also benefit from a geographic diversification in the event of acquiring Rezidor.

Another potential acquirer is Homeinns, which is the tenth largest hotel company as well as being China’s market leader. Operating a portfolio exclusively containing hotels in the economy segment in China, we see several reasons why the company would be interested in buying Rezidor (Homeinn, 2015). By acquiring Rezidor, Homeinns would effectively diversify its highly homogenous revenue streams, hedge the impact of the sharing economy on the economy segment and increase its global hotel network.

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