Description

Radisson Hospitality AB (“RADH”) is European-focused, asset-heavy hotel operator trading at an attractive EBITDA multiple (4.2x-6.4x) and a high free cash flow yield (10-15%) with a high-quality CEO and an achievable turnaround plan that will act as a catalyst to re-rate the stock. RADH is essentially unlevered and equity upside is 50-100+% if RADH executes its turnaround plan and re-rates to peers.

Investment Merits:

• Attractive valuation: RADH trades at 6.4x 2017 EBITDA and 5.5x 2017 adj. EBITDA and a 10% 2017 adj. levered free cash flow (FCF) yield assuming maintenance capex of 4.0% of sales (historical D&A % of sales) and giving credit to management’s projected cost cuts. RADH trades at 4.2x adj. EBITDA and a 15% adj. yield assuming maintenance capex and management’s full turnaround plan with growth capex assumed to be equity funded and capitalized in the market cap. RADH has traded cheap because of issues that will be resolved, namely perceived structural profitability challenges (below), low institutional coverage, illiquidity in the stock. European-focused, asset-heavy comps trade at 10.5x 2017 EBITDA and a 6.4% 2017 FCF yield, implying ~50% upside if assuming only cost cuts and 100+% upside if assuming the full management plan. Additionally, RADH is essentially unlevered with €31.6MM of net debt and €625.0MM TEV.

• Turnaround story: CEO Federico Gonzalez successfully executed a turnaround plan at NH Hotel Group from 2012-2016, improving EBITDA margins from 7.0% to 14.8% driven by improving room rates and occupancy through investments in refurbishing properties and expanding the portfolio, exiting unprofitable leases, and reducing costs. RADH’s margins have lagged comps by an average of ~500bps over the last 5 years and Gonzalez has outlined a similar plan to improve margins and grow EBITDA over the next 5 years. Progress on the turnaround plan will be a key catalyst for rerating the stock.

• Potential takeout candidate: In August 2018, majority owner HNA (70% ownership) announced an agreement to sell its stake to Jin Jiang International. While Jin Jiang International is 4.5x levered, it is not distressed and is more focused on hospitality than HNA. Under Swedish law, Jin Jiang is required to make a tender offer at SEK 35/share providing a floor to the stock through expected close in the winter of 2018. RADH is also a potential takeout candidate with Jin Jiang owning 12% of Accor, a French hotel group. It is relevant to note that while HNA has agreed to sell to Jin Jiang. Hyatt did make an unsolicited and unsuccessful bid for peer NH Hotel Group and may be interested in pursuing RADH although has not made any public indications.

Investment Risks:

• Macro / hotel cycle: Hotels are cyclical businesses and are at risk for the cycle turning. Given operating leverage in the business, margins and profitability could be at risk in a downturn.
  • Mitigant: RADH is essentially unlevered, mitigating some of the operating leverage. Over the last 13 years, the lowest RADH and its peer group have traded at is an average of 5.2x EBITDA in 2009. Given that management expects to achieve its cost cuts in the next 1-2 years, and RADH’s attractive valuation, the downside is fairly well-protected. Additionally, Jin Jiang’s purchase will require a tender offer at SEK 35/share (4% downside from current price) providing a floor for the next ~3 months.

• Chinese-controlled ownership: Jin Jiang International is controlled by the Chinese government, which creates a risk for a continued ownership overhang on the stock.
  • Mitigant: Jin Jiang, while 4.5x levered, is currently not in distress like HNA. While the market would likely be more comfortable with a non-Chinese owner, Jin Jiang has had equity and business partnerships with Accor, Thayer Lodging/Brookfield Asset Management, Marriott, Hilton, etc. Jin Jiang also operates across the hospitality spectrum with hotels in China (~50% of revenues), hotels in North America and Europe (~20%), as well as a vehicle/logistics business for tourists and a travel agency, providing diversification.

• Master Franchise Agreement / Parent License Fees: Radisson Hotel Group (RADH parent) owns the Radisson and Park Inn brands and RADH pays a licensing fee for the right to use the brands. There is a risk that Jin Jiang tries to move profits from RADH to Radisson Hotel Group through the Master Franchise Agreements (MFAs).
  • Mitigant: From conversations with management and from reviewing disclosed detail in the annual reports and recent bond prospectus, RADH’s MFAs with Radisson Hotel Group cannot be altered even in a change of control without approval from the independent members of the board (currently 6 out of 9 board members). The agreements are valid until 2052 and RADH has exclusivity on the Radisson and Park Inn brands for Europe, Middle East, and Africa. The MFAs are composed of a variable royalty of 0.3% of room revenue, a marketing fee of €2MM/year, a reservation fee for the cost of the parent’s reservation system, reimbursement of the parent’s costs of the loyalty rewards program, and certain third-party costs. This fee has been constant over the last 5 years and is not expected to materially change going forward.

Business Description: Radisson Hospitality AB (“RADH”) is a Swedish-listed hotel operator founded in 1960 and headquartered in Brussels, Belgium that leases (21% of rooms), manages (52%), and franchises (27%) hotels in mostly Europe (17.6% of rooms in Nordics, 32.5% in Western Europe, 30.2% in Eastern Europe) as well as some Middle East and Africa (19.7%). Radisson operates a portfolio of 369 hotels with 81,132 rooms with an average daily rate of €109 and occupancy of 69%. The company was recently rebranded to Radisson Hospitality from Rezidor Hotel Group in an effort to unify the Radisson brand under which essentially all of its hotels operate. HNA Group currently owns 100% of RADH parent Radisson Hotel Group (f.k.a. Carlson Rezidor Hotel Group), which operates over 930 hotels in the Americas and APAC. Radisson Hotel Group owns 51.15% of RADH and HNA directly owns 18.5% of RADH for a total stake of 69.65%. HNA announced on August 9, 2018 an agreement to sell its ownership of Radisson Hotel Group and its stake in Radisson Hospitality to Jin Jiang International, a Chinese hospitality conglomerate controlled by the Chinese government that also owns 12% of France’s Accor SA.

CEO Background and RADH Turnaround: Federico Gonzalez was appointed CEO of RADH in May 2017. He began his career at Proctor & Gamble where he was for 16 years followed by Deputy General Manager of Disneyland Paris. He was most recently CEO of Spanish hotel operator NH Hotel Group (“NH”) from 2012 to 2016 where he led a successful turnaround in which EBITDA margins improved from 7.0% to 14.8%, driven by 4 main factors:

• Average Daily Rate (ADR): ADR improved from a low of €77.5/night in 2013 to €95.2/night in 2017, driven by a substantial capex investment in 2014-2016 in various hotels.

• Occupancy: Occupancy improved from mid-60% to a high of 70.8% in 2017 driven by hotel improvements as well as an optimization of the portfolio through lease cancellations and sale/purchase of assets

• As a result, RevPAR (ADR x Occupancy rate) in 2017 reached €67.4/night versus the ~€50/night average pre-2012.

• As a result of room expansion (5.1% 5yr CAGR) and RevPAR growth, revenue also grew at a 3.7% 5yr CAGR which drove margin expansion.

• Exiting Leases: NH exited 27 and restructured 109 unprofitable leases out of 200 leased hotels (68% of leased hotels; 378 total hotels). As a result, rental expense as a % of sales declined from 22.4% in 2012 to 20.1% in 2017.

• Reducing Personnel Costs and Direct Management Expense: NH optimized support functions (IT, admin, commercial) and cut costs to reduce personnel costs as a % of sales from 35.5% in 2012 to 33.7% in 2017. Similarly, direct management expense fell from 35.1% of sales in 2012 to 31.4% by 2017.

RADH’s margins have consistently lagged peers’, which has created the valuation gap and the current turnaround opportunity. EBITDA and EBIT margins have averaged 9.2% and 3.1%, respectively, over the last 5 years versus comps at ~14% and ~8%, respectively. In January 2018, Federico outlined a 5-year turnaround plan for RADH which is similar to the turnaround at NH. The key initiatives of the plan are: 1) improving ADR by refurbishing existing hotels and expanding the “Radisson Collection” line to target the upper luxury segment, 2) exiting 14 loss-making leases, which generated €15.5MM in EBITDA losses in 2017, 3) cutting costs as a result of portfolio optimization, restructuring support functions, outsourcing of housekeeping, etc. Given Gonzalez’s experience at NH and the similar profile of turnaround, RADH seems well-positioned to benefit from improving margins and revenue as management has outlined, resulting in ~€90MM of EBITDA improvement over 5 years:

Comps / M&A Potential:

• Other European-focused, asset-heavy hotel chains at similar price-points to Radisson include NH, Scandic Hotels (“Scandic”), and Melia Hotels (“Melia”). They trade at an average of 10.5x 2017 EBITDA and 6.4% 2017 levered FCF yield today and have traded at an average of 11.2x EBITDA over the last 13 years (below).

• As a recent comp, Minor International ($5B market cap Thailand-based hotel operator) bought a 44% stake of NH through several purchases including Oceanwood Capital’s ~8% stake in May 2018 and HNA Group’s 26.5% stake in June 2018 for €619MM, which implied a €2.97B EV valuation or 12.8x 2017 EBITDA, 11.2x 2018E EBITDA. Minor made an offer to buy the remaining stake in NH Hotels in June at €6.40/share. After this offer, Hyatt sent a letter expressing interest in making an offer for NH despite Minor’s tender offer and existing stake. No price was announced and shortly afterwards, Hyatt backed off the offer saying that it would be impractical to execute.
• Given the similarity in asset profiles between NH and RADH, it seems likely that Hyatt would be interested in acquiring a stake in RADH given its failed offer for NH. While HNA already has a sale agreement with Jin Jiang, Hyatt did make an unsolicited offer for NH in the face of Minor’s 44% stake and may be tempted to do the same thing here, particularly given that the board is majority independent. On the other hand, Jin Jiang International owns 12% of Accor SA and there is some speculation that Accor will acquire RADH. While not a comp given its asset-light business model, Accor does trade at ~28x 2017 EBITDA, well above asset-light peers at ~16.5x and could utilize its equity currency in a deal.
  

Disclaimer:
The author is presenting the views of an investment firm that has a material long position in the securities of the company discussed herein. The author is not otherwise affiliated with such company, including as an employee, director or consultant. The views expressed herein are provided solely for informational purposes and do not constitute an offer to sell, or the solicitation of an offer to buy, any security. The information provided herein is not intended to be, and should not be, relied upon as an investment recommendation in connection with any investment decision. The contents of this message should not be construed as legal, tax, accounting, investment or other advice. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained herein by the author or its affiliates and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions. The information and opinions contained herein are provided as of the date this message is originally posted. The author has not independently verified all information contained herein and has no obligation to update any of the information provided. The views expressed herein are subject to change without notice at any time and the author and its affiliates may trade in any manner in the company’s securities, whether consistent or inconsistent with the information provided herein, as they deem appropriate. Past performance of a security is neither indicative nor a guarantee of future results of such security. There can be no assurance that an investment in the company will be profitable or that the assumptions regarding future events and situations will materialize or prove correct.

Catalyst

Turnaround story driving improvement in EBITDA and FCF, potential takeout