US-based hotel chain Wyndham Worldwide Corp. is in advanced stages of talks to acquire Sarovar Hotels Pvt. Ltd, said two people directly familiar with the matter.
The deal, if concluded, will mean a significant expansion for Wyndham, one of the world’s largest hospitality firms, in India. Wyndham currently operates 25 properties in the country, with another 28 in the pipeline, according to an October 2015 release on its website.
“The transaction is still two months away from closure and discussions are on regarding valuations. At this point Wyndham has offered Rs.500 crore as equity valuation and it will take over the debt of the firm. The deal is taking time to close due to a lot of structuring involved in it,” said one of the two people cited earlier, both of whom spoke on condition of anonymity.
An email sent to Wyndham Hotel and Sarovar Hotels on Thursday evening remained unanswered. Calls and text messages to Ajay Bakaya, executive director at Sarovar Hotels, also went unanswered.
Sarovar, promoted by Anil Madhok and Ajay Bakaya, has 70 hotels across 48 locations in India, according to its website. It also has a global presence. The brand operates in three segments—Sarovar Premier, Sarovar Portico and Hometel. It also manages Radisson, Park Plaza and Park Inn by Radisson.
Sarovar’s promoters had sold a 28% stake in the firm to US-based venture capital firm Bessemer Venture Partners and US-based private equity fund New Vernon Private Equity in December 2005. These investors will also likely exit Sarovar through this sale, said the two people cited earlier.
On 23 November, DNA Money reported that Wyndham had initiated talks with Sarovar Hotels.
Wyndham has over 7,800 properties and 678,000 rooms in 72 nations. It operates brands such as Dolce, Wyndham Grand, Hawthorn and Ramada. In India, it has properties in Bengaluru, Mumbai, Gurgaon, Goa, Jaipur and Udaipur, among others.
The hotel sector has seen an increase in investment and merger and acquisition (M&A) activity over the last two years. In November last year, Marriott International Inc. acquired Starwood Hotels and Resorts Worldwide Inc. for $12.2 billion to create the world’s largest hotel chain with top brands, including Sheraton and Ritz Carlton.
Closer home, firms in the sector are starting to tap investors as prospects for the industry are starting to show early signs of improvement. On 5 January, Goldman Sachs Group Inc. invested Rs.440 crore to acquire a minority stake in Samhi Hotels Ltd. Among the major deals of 2015 was the acquisition of Leela Hotels’ Goa property by Malaysia-based conglomerate MetTube Sdn. Bhd. for Rs.725 crore and ITC Ltd’s acquisition of Park Hyatt Hotel in Goa for Rs.550 crore.
“The hotel industry in India has witnessed increased activity and is witnessing renewed investor interest. There has also been rationalization that has been witnessed in trends related to valuations. At current valuations, the replacement cost values are close to open market valuations and hence there is renewed interest from investors,” said Siddharth Thaker, managing partner at Prognosis Global Consulting, a consultancy firm for the tourism and hotel sectors.
After a long time, the industry is witnessing growth both in terms of occupancy and average rates. Property consultant JLL estimates demand for hotel rooms is growing at 11-12%, while fresh supply has fallen as much as 5% in the past year. This has helped improve occupancy levels and pricing.
According to a 21 September report by HVS Global Hospitality Services, a hospitality consulting firm, hotel occupancies in India stand at 60.3%, after remaining at sub-60% levels in 2010-14.
The improving environment is one factor leading to increased investor interest. In addition, there is greater visibility in exits from such investments as rules on real estate investment trusts (REITs) have been finalized.
“Hotels as an asset class are classified as commercial real estate. The overall regulatory environment in terms of REITs is getting more stable. This allows institutional investors and PE funds to define clear exit strategies and this has assisted with the deal activity in hotels in India,” said Thaker.
According to VCCEdge, the financial research platform of VCCircle, 21 M&A transactions were concluded in the hospitality sector for nearly $419.59 million in 2015, as against 10 deals in 2014. Hospitality transactions peaked at $1.3 billion in 2012.