Why InterContinental Hotels’ “asset-light” strategy drives growth

InterContinental’s “asset-light” strategy

InterContinental Hotels Group (IHG), the UK-based hotels group, has seen an activist push from Mick McGuire’s Marcato Capital Management. The San Francisco-based hedge fund is pressuring the hotel company to explore strategic alternatives, including a sale to a U.S. based hotels group. Marcato said it has hired Houlihan Lokey to conduct a strategic review of the company to explore ways to improve shareholder value.

In this part, we’ll explore the benefits of IHG’s asset light business model.

                                   Note: The table has been updated to reflect the correct data.

Similar to peers in its space such as Wyndham Worldwide (WYN), Starwood Hotels (HOT), Marriott (MAR), and Hyatt Hotels (H), IHG is pursuing an “asset-light” business model. The company said on its website that its “business model is focused on franchising and managing hotels, rather than owning them, enabling us to grow at an accelerated pace with limited capital investment. We call this ‘asset light.’ This business model allows us to focus on building preferred brands based on guests’ needs, and on strong delivery systems, such as our branded hotel websites and call centers.”

IHG’s hotels typically operate under one of three different business models—owned, leased, managed, or franchised:

• Owned or leased hotels are owned and operated by an owner who bears all the costs associated with the hotel, but also benefits from all of the income
• In a managed hotel, the owner of a hotel will use a third-party manager to operate the hotel on its behalf and will pay the manager management fees and, if the hotel is operated under a third-party brand name, brand licensing fees
• A franchised hotel is owned and operated by an owner under a third-party brand name and the owner will pay a brand licensing fee to the brand owner

IHG added that its business model “allows us to create greater returns for owners whilst leaving asset management and real estate to our local third-party owners with the necessary expertise.” IHG said a key characteristic of the franchised and managed business model is that it’s highly cash generative, with a high return on capital employed. The asset-light approach means the company benefits from the reduced volatility of fee-based income streams compared with the ownership of assets, resulting in a high-quality income stream. The company said in its annual report that depending on the market maturity, owner preference and, in certain cases, on the particular brand, hotels can be franchised or managed. It provided an example of the U.S., a mature market, where IHG operates a largely franchised business, working together with owners to deliver preferred brands. In contrast, in China, IHG operates a predominantly managed business where it’s responsible for operating the hotel on behalf of its owners.

IHG sees $442 million offer for InterContinental Paris – Le Grand 

By the end of last year, IHG said 85.6% of its hotels were operated under license by franchisees, 13.7% under management contract with only 0.7% still under its ownership. Earlier this year, IHG, whose brands include Crowne Plaza and Holiday Inn, sold InterContinental Mark Hopkins San Francisco and an 80% interest in InterContinental New York Barclay with net cash proceeds of $346 million. It recently said it has received a binding offer from Constellation Hotels Holding Ltd. to acquire InterContinental Paris – Le Grand for a proposed purchase price of $442 million.