Analyzing Starwood’s acquisition of Design Hotels

In what the company describes as purely an investment, Starwood Hotels & Resorts Worldwide Inc. has agreed to acquire the nearly half-stake in consortium Design Hotels AG controlled by Arabella Hospitality SE, Munich. The deal was announced in early December and is expected to close during the first quarter, pending regulatory approval in Germany.

Berlin-based Design, the world’s 23rd-largest consortium, is a publicly traded company that provides distribution, sales, marketing and consulting services for more than 200 member hotels in 40 countries. The consortium has a strong reputation among savvy global travelers for its hotels’ avant-garde design aesthetics.

“This was an opportunistic investment that came to us through a longtime partner. We have long admired Design Hotels, and we’re excited to have a seat at the table as a shareholder,” said K.C. Kavanagh, senior vice president of global communications for Starwood. “We believe in the power of the Design Hotels brand, its executive team and the long-term future of the company. Design Hotels is unique in its niche, and we see a lot of potential for further growth of Design Hotels. As a shareholder, we want to support this growth.”

Starwood executives said the company will not be involved in day-to-day operations of Design, nor will the consortium participate in any of Starwood’s centralized delivery systems, including reservations and the Starwood Preferred Guest loyalty program. Design founder and CEO, Claus Sendlinger, will continue to head up the organization.

“Though Design Hotels’ and Starwood’s business models remain inherently different, we share a commitment to excellence in hospitality, and we look forward to the exchange of ideas and creating further paths for innovation,” Sendlinger told HOTELS. “Having Starwood with its leading global footprint and lifestyle brands as an investor is a further validation that Design Hotels is a strong brand of global relevance as we continue to grow and focus on our niche in the ‘new luxury’ hotel segment. Starwood has a keen appreciation for what makes Design Hotels distinct and special, and that is the creative spirit of our visionary hoteliers.”

The transaction came about through Stamford, Connecticut-based Starwood’s longtime relationship with Arabella, which sought to divest of its Design stake after recently refocusing its hotel strategy on ownership and asset management. Starwood and Arabella had previously been engaged in a joint venture, StarwoodArabella Hotels & Resorts. When Arabella dissolved the joint venture in August 2010, Starwood was managing 43 of Arabella’s properties in Germany, Spain and Switzerland, many of them under Starwood flags. Starwood continues to manage or franchise 20 Arabella-owned hotels in Europe.

The value of the transaction has not been made public, but analyst Smedes Rose, who tracks Starwood on behalf of Keefe, Bruyette & Woods, New York City, estimates the deal at about US$4 million. If that figure is accurate, Starwood could have seen the deal as an opportunity to pick up a well-respected international brand at a relatively paltry price. “That’s kind of a rounding error for Starwood,” Rose said. “It gives them a place at the table, and it’s not a lot of money. It’s certainly not going to hurt them from an earnings perspective.”

Moreover, Design fits well with Starwood’s overall market presence, with a mutual focus on design-driven hotels and hip, culturally attuned clientele. Rose trusts Starwood’s stated intent to be largely hands off in Design’s day-to-day operations, but he believes that Starwood could ultimately view some of Design’s member properties as good fits for rebranding under Starwood’s flags. “Or maybe not,” Rose said. “Possibly, they’re just doing a favor for Arabella.”

The Gramercy Park Hotel in New York City is a member of Design Hotels
The Gramercy Park Hotel in New York City is a member of Design Hotels