Hyatt Hotels Corp. on Monday announced the acquisition of multi-branded lifestyle management company Two Roads Hospitality.
The Chicago company bought Two Roads for a base purchase price of US$480 million, with the potential to invest up to an additional US$120 million in the aggregate contingent on the outcome of certain terms to be individually defined after the closing later this year. The base plus contingent purchase price is expected to reflect an EBITDA multiple of 12x to 13x stabilized 2021 earnings.
The addition of the 85-hotel Two Roads portfolio, representing US$2 billion in property revenues under management in 23 markets and eight countries gives Hyatt a new set of lifestyle brands, including Alila, Destination, Joie de Vivre, Thompson and Tommie.
Hyatt will start a lifestyle division after the deal closes, as well as assume management of the portfolio for property owners including Two Roads principals, John Pritzker’s Geolo Capital and Robert Lowe’s Lowe Hospitality Group. Pritzker and Lowe had merged their management companies in 2016.
Two Roads Hospitality is the result of the roll-up of several hotel management and boutique brand companies. Pritzker’s private equity firm, Geolo Capital, acquired Joie de Vivre hotels in 2010 and renamed the company Commune Hotels and Resorts after forming a 50-50 joint venture with Thompson Hotels in 2011; Geolo later bought out Thompson’s stake in 2013. Destination (a third-party hotel manager) and Commune merged in 2016 creating Two Roads Hospitality, where Pritzker has been serving as co-chairman with Lowe.
“We have done things differently than the way large brands do things,” Pritzker told HOTELS on Monday morning. “They [Hyatt] are interested in that fairy dust and building those kind of experiential stories.”
Pritzker said Geolo will continue to develop Two Roads brands with multiple projects in various stages of development, and as a result of the deal will become one of Hyatt’s biggest clients.
“I have to disagree with Two Roads owners who think we are taking the loot and running,” Pritzker added. “We will be Hyatt’s largest client and I want other Two Roads owners to understand we are in the same boat they are.”
One could also that assume the familial relationship between Two Roads’ Pritzker and the biggest shareholders in Chicago-based Hyatt, the Pritzker family, could have had something to do with the deal getting done, but John Pritzker, who has no financial interest in Hyatt, said that was not the case.
“Tom [Pritzker, John’s brother] was funny as he kept telling the Hyatt board this is my brother we are dealing with,” John Pritzker joked. “But Tom and I didn’t spend more than 10 to 15 minutes talking about the deal. We are both thrilled it got done, but it had nothing to do with our relationship. However, no one is happier than our mom. She is thrilled with the outcome and at the end of the day what is more important than that.”
John Pritzker added that Two Roads was not on the market, but after two unsolicited bids (neither from Hyatt) the company decided to open a process to a wider audience, and Hyatt bubbled to the top.
“A concern I’ve had for our company is that when the music stops, and it will, I don’t want to be the guy without a seat,” Pritzker added. “We are the biggest and best of what we do, and certainly now as consolidation accelerates. With distribution limited and the capital we would have to sink into the company, it wasn’t practical. So we wanted to find best home and I think we did.”
After buying his first property in 2009 and in 2016 merging with Lowe, Pritzker said that he is really gratified with what the team has accomplished over nine years, adding that he plans to take the proceeds of the sale and put it back into real estate.
For Hyatt, President and CEO Mark Hoplamazian said it grows the company’s brand presence, and with Two Roads’ existing portfolio in Asia, speeds up expansion in what he terms a “critically important and fast-growing part of the world.”
Consistent with Hyatt’s long-term growth strategy to drive shareholder value, this investment in a high-growth, capital-light platform accelerates Hyatt’s evolution to a more fee-driven enterprise, funded by proceeds from an asset disposition program in which real estate has been monetized at an average multiple of approximately 16.5x EBITDA to date. Notably, Hyatt is making this growth investment in a year in which it has committed to return approximately US$800 million of shareholder capital through a combination of share repurchases and a cash dividend.
When asked about the transition, a Hyatt spokesperson said, “Both Hyatt and Two Roads are committed to a seamless transition, which will include a number of senior leaders, including [Two Roads CEO] Jamie Sabatier who will remain an active part of the transition team. As with any transition of this size, it will take time to evaluate responsibilities and thoughtfully determine our path toward an integration. We do not anticipate significant changes to hotel operations and staffing.”
In his note about the deal, R.W. Baird analyst Michael Bellisario said “while brand/management transactions typically do not require owners’ approval, we believe there is some risk that certain owners could choose to exit the Two Roads system following the pending transaction given the shorter-term nature of their management contracts (similar to the Kimpton-IHG terminated contracts post-transaction announcement). Also, radius restrictions and areas of protection must be considered and could cause flag changes to occur or Hyatt to compensate existing owners.”
Bellisario added that overall, Baird believes the going-in multiple is likely much higher than the quoted 12x-13x 2021 EBITDA multiple due to potential contract turnover and the additional pipeline growth included in 2021 estimates. “We expect some integration-related noise in the near term given potential contract turnover, but this transaction and its qualitative benefits for the brand represent a long-term bet for Hyatt,” he said.