The $1.35 billion sale of a hospitality procurement business won't yield a direct earnings benefit for its majority owner, Marriott International Inc., but should help the hotel operator in less tangible ways, analysts said.
The company, Avendra LLC, is being sold to Aramark Corp. Avendra's owners — Marriott, Hyatt Hotels Corp., AccorHotels, InterContinental Hotels Group Plc and ClubCorp — expect to receive total cash proceeds of roughly $1.18 billion.
The hoteliers created Avendra in 2001 from their own procurement operations to gain greater scale, and therefore lower prices, in buying food and other supplies. The company does not take possession of the goods, but charges its clients a fee for negotiating contracts with suppliers.
Avendra has grown over the years and now derives most of its revenue from providing services to companies other than the founders. Aramark will likely look to grow the business further by taking on more clients, and such growth could, in turn, help the hotel companies by pushing unit costs for supplies still lower, Robert W. Baird analyst Michael Bellisario said.
Marriott, which holds a 55% stake in Avendra, will receive roughly $650 million in cash from the sale — a handsome return on an original $13 million investment that the hotel operator has already recovered from Avendra's dividends. Yet the deal will not materially affect Marriott's financial results, because the company promised its hotel owners when Avendra was formed that it would pass on the business' proceeds to hotels in its system, spokeswoman Laura Paugh said.
Patrick Grismer, CFO of Hyatt, which owns the second-largest stake in Avendra with an 18% share, said in an emailed statement that his company will also put proceeds toward the benefit of Hyatt hotels.
The world's second-largest hotel brand company, Hilton Worldwide Holdings Inc, uses an in-house supply provider.
While large hotel brand companies like Marriott, Hilton and Hyatt own some properties, most of their business is focused on franchising and managing properties in return for fees charged to hotel owners, including private investors and REITs. Marriott provides other services, including reservations systems, revenue management services, sales and marketing, to property owners at cost.
Marriott's proceeds from the sale — like the profits Avendra made for the hotelier after the initial investment was repaid — will flow toward the services for which it typically passes along costs to property owners, thereby reducing the amount that Marriott would otherwise charge the owners, Paugh said.
Marriott plans to enter into a five-year procurement contract with Aramark on behalf of its North American managed hotels, and property owners should see little difference in their supply procurement process during that time, analysts said.
The company may record the proceeds of the sale as restricted cash on its balance sheet, or it could use them to pay down debt while listing a liability for the amount it owes the hotel owners, Paugh said, adding that either way, "We'd still have a responsibility to use it to support the system."
Even without a clear financial benefit to the company, spending $650 million on systems should give Marriott a competitive advantage, analysts said. Bellisario said making individual hotels more profitable through better procurement deals could help the company's reputation among owners, and RBC Capital Markets analyst Wes Golladay said improvements to marketing and reservations systems could increase property-level revenue.
Further, Golladay said, a reputation as a better operator could lead to more hotel development deals.
Because the $650 million is earmarked for hotel systems, "it's really hard to connect the dots" on the ways it will benefit the company, Golladay said. Still, he added, "I do think any time you pump this much money into the system, it's got to be better for you."