Mergers and acquisitions are not new to the Indian Hospitality Industry. The year 2016 was slow and dismal, especially in this industry, but 2017 has started off with a bang! A big acquisition has started off the year on a good note for the hospitality industry. The Louvre Hotel Group, which is a part of the Jin Jiang International Holdings, has purchased a majority stake in the company, Sarovar Hotels. In addition to this particular acquisition, about 12 to 15 hotel asset transactions are expected to be carried out in 2017. This shows that the Indian hospitality industry is a fertile field of strategic acquisitions by various players.
Various investors are not willing to take the risks of establishing a new hotel in the country, which is the reason behind acquisitions being an easy choice. The transactions are occurring at discounts related to replacement costs while the difference between the buyer and seller price continues to be a deterrent. The current operating trends in hotel performance are showing an evidence of a positive growth cycle which is the reason behind the strategic acquisitions. The last significant hotel transaction took place in 2015, post that, 2016 has remained dull and 2017 has just started on a high note.
Every hotel buyer understands the industry and the hotel segment business cycle, the performance and occupancy has resumed which reflects a strong growth for the coming periods in the hotel market. The new hotel supply is expected to develop at a rate of 4% over the next 3 years, which makes it an ideal opportunity for an investment. Currently, there are about 80 hotel assets up for a transaction across India, while many do not qualify in terms of location and product requirements, the buyers for the space can soon be found. Given the risks associated with the development of new hotels and the long gestation period, investors are showing little or no interest in making an investment. For a hotel to be built and start operations, it could take about 6 to 8 years, hence, investors are taking the shorter route and acquiring well established hotel assets in the Country. Investors are looking at opportunities to drive adequate returns on their investment as this industry gears up for the performance upcycle and a gain in the momentum of the economy.
Since the financial investors are not showing much interest in this space due to the low performance of the hotels, the hotel assets are sold at more than 30 times the EBIDTA which is below 40% the replacement cost. This kind of market suits the investors who are trying to grow their acquisitions in the market and are looking forward to a better performance of these assets through their asset management skills. If the current trend continues, we will see many acquisitions shaping up in this industry with the entry of new players who are hoping to make the most of the economic momentum as well as the upswing in the hospitality industry.