Hong Kong: Hospitality And Leisure M&A: Disruption And Innovation Driving Deals In A Fragmented Industry

Last Updated: 18 October 2016
Article by Mark Uhrynuk and Rod Brown
Most Read Contributor in Hong Kong, November 2016

In recent years, M&A activity in the hospitality and leisure (H&L) industry has grown significantly. Even as global M&A deal values for the first half of this year fell below where they were 12 months ago, large-scale, cross-border M&A activity in the H&L sector has dominated the headlines with a number of high profile deals in 2016.

Certain trends are driving this activity:

  • A fragmented industry facing a number of challenges from new players forcing market consolidation and a race to scale up;
  • A quest for vertical integration to fill product gaps across the value chain;
  • The need for more efficient and effective global platforms to protect and increase market share and provide greater leverage (particularly in response to online travel agents);
  • New money from both developing and mature economies in Asia; and
  • Innovative platforms, such as airbnb, Travelmob and OneFineStay and the need for more traditional groups to develop a response to these new competitors.

These deal trends and the inherent disruption and consolidation impacting the H&L sector present opportunities for owners, operators and other market participants.

We highlight below some of the key issues that prospective participants should bear in mind when negotiating and executing cross-border M&A deals in the H&L sector.

The Cross-Border Context

Cross-border M&A transactions involve a number of challenges as political, cultural and economic landscapes shift and regulatory regimes develop and evolve. While the many "cultural" challenges encountered on a typical cross-border M&A deal will not be discussed here, they serve to complicate the various substantive issues that arise in a cross-border transaction. Although the specific risks will vary depending on the jurisdictions and parties involved, it is possible to mitigate exposure through proper preparation and planning, thoughtful and frequent communication, and disciplined execution.

We discuss below four key areas to focus on when executing an M&A transaction in the H&L sector.

1. TRANSACTION FRAMEWORK: PRICING, TIMING AND CERTAINTY

The pursuit of overarching strategic objectives typically motivates buyers and sellers to explore M&A opportunities. Once engaged, however, pricing (value), timing and a desire for certainty drive the parties throughout a deal. Each will attempt to maximise the value obtained from a transaction while minimising risk, but they will nearly always share a desire for certainty in completing the transaction within their desired timeline while maintaining their good reputations in their business, shareholder and industry communities.

The ability of a party to control these factors, however, may be dictated by the transaction framework. If the transaction involves the acquisition of (or merger with) a publicly-listed entity, special rules will apply. For example:

  • Acquisitions of public companies will be played out in public and typically to a tight timetable - with less opportunity for detailed due diligence (see further below) - and are more likely to attract rival bidders;
  • In the UK, Hong Kong and Singapore, mandatory bid rules apply (requiring the acquirer to offer to purchase all shares of the target if a certain threshold percentage of shares are acquired);
  • If the target is listed in the UK, proof of certain funds will be required at time of making the offer; when acquiring a public company in the US, there are detailed procedural and disclosure rules (including disclosure of purchases of more than 5% of a class of listed securities), but no mandatory bid provisions apply; if the target is a US public company, consider and understand in advance the realities of the US litigation climate; even in the context of friendly deals that offer the target shareholders a substantial premium, it is routine for professional plaintiffs' lawyers to bring shareholder class action lawsuits against both the target and the acquirer as soon as the deal is announced; litigation (initiated by the target and/or the target's shareholders) is even more likely in the context of a hostile deal. The approach adopted in the Marriott-Starwood transaction as to pricing and certainty is not unusual in the context of a US public company merger. The transaction was structured as a share for share and cash merger in which the parties agreed to a fixed "exchange ratio" (i.e., Starwood shareholders received a fixed amount of cash and a fixed percentage of Marriott shares in the deal without adjustment for subsequent movement in the share price of either party's shares). In addition, the Marriott Starwood transaction included a "no shop" provision and mutual termination fees as deal protection. Starwood undertook not to solicit alternative transactions which would result in the acquisition or disposal of 25% or more of its (and its subsidiaries') consolidated revenues, net income or assets, subject to an exception for negotiating a proposal received which is deemed a potentially "superior proposal" after consultation with outside counsel and a financial advisor. The transaction also provides termination fees of US$450 million in the event that either party terminates the transaction and announces an intention to enter into an alternative transaction or either party fails to obtain its required shareholder approval for the transaction.

While buyers and sellers will generally continue to operate their businesses normally during an M&A transaction (and even obtain representations that they will do so until completion), the transaction, in particular if public disclosures are required, could garner additional public scrutiny. The consequences range from negative publicity, defensive board action to potential shareholder lawsuits. When Marriott announced its agreement to acquire Starwood, lawsuits were launched within days in both New York and Chicago by owners who claimed that the merger would breach radius restrictions in the management contracts. Also, following the announcement of HNA Group's acquisition of Carlson Hotels Group and its brands, one of HNA Group's joint venture partners removed HNA's appointed joint venture board members due to concerns that the acquisition created a conflict of interest. HNA Group subsequently filed suit against its joint venture partner in an attempt to reverse these board member removals.

If the target is a private entity but the transaction is structured as a competitive auction, buyers should be aware that the transaction is highly process driven – seller regulated and controlled – which can impact structuring flexibility. In such a scenario, a buyer must understand clearly its value and risk parameters early in the process. While pricing is important, speed and deal certainty are key criteria to a seller and its advisers. These transactions often favour nimble buyers.

2. ANTITRUST AND COMPETITION

The continuing consolidation in the H&L sector and the increasing level of scrutiny placed on M&A deals by a growing number of competition authorities makes this an area of caution for market participants. Many transactions will have to be notified to competition authorities in multiple jurisdictions and often require specific clearances before the transaction can proceed. Detailed information filings and disclosure may be required. Advance planning and regulatory advice is critical to avoid delays and potentially significant fines. In certain cases, transactions can be blocked or divestitures required. Competition regulators are constantly reassessing the relevant market and typically communicate with one another across jurisdictions.

In the H&L sector, threshold questions and considerations for potential M&A participants include:

  • Are there obvious overlaps between your existing brands and the segments in which they operate and the brands/segments of the target?
  • How will each national regulator view the brands and the segments in which they operate and how will the competition authorities view the different hotel categories in their assessment?
  • If the merger or acquisition significantly increases market concentration (assessed in the light of the brands and segments referred to above), is there a risk of divestiture to obtain clearance?
  • In the context of the industry consolidation trend, it will be especially important to consider the nature of an overlap between the operations of the buyer and the target operations.

As there will likely be notice and regulatory filing requirements, parties should consider the timing requirements and whether covenants or undertakings should be included in the documentation to require these requirements to be met on a "best efforts" basis or as a condition precedent.

The Marriott-Starwood transaction required antitrust/merger control clearances in the United States, the European Union, China and a number of other jurisdictions. While both Marriott and Starwood provide similar hotels and related services amenities, as their combined market share was only 14% of hotel rooms in the United States and 7% globally, it did not raise obvious competition concerns and was cleared by the anti-trust regulatory authorities in each of the key jurisdictions referred to above. The merger agreement between Marriott and Starwood contained a typical provision requiring each party to use its reasonable best efforts to obtain all governmental and regulatory clearances and approvals but also provided that neither party would be required to make divestitures of greater than US$ 700 million in value as part of those efforts.

3. REGULATORY COMPLIANCE

In the increasingly complex and interconnected world of compliance, buyers (and sometimes sellers) have compliance matters high on the list of diligence and risk mitigation issues. This broad category covers activities such as bribery, fraud, sanction violations and money laundering as well as cyber security and data privacy matters. The ongoing and high profile enforcement of laws such as the U.S. Foreign Corrupt Practices Act (or FCPA) and the U.K. Bribery Act means buyers act at their peril if they ignore these potential areas of concern. It is not unusual for buyers to retain separate advisers to handle a forensic and integrity due diligence exercise on the target business and key individuals. If identified and addressed early it is possible that these issues will not kill the deal. Late discovery or disclosure, on the other hand, will inevitably impact deal value and certainty of execution.

Another important area to consider in the context of cross-border M&A is the application of foreign investment/national security laws and regulations. While the operation of a traditional H&L business may be an unlikely candidate to trigger national security concerns, depending on the location of the real estate involved and the nature of the buyer issues could arise. For example, Anbang's acquisition of the Waldorf Astoria New York was scrutinised by the Committee on Foreign Investment in the United States (or CFIUS) - the committee which reviews transactions which may raise national security concerns in the United States - as the hotel is located close to the United Nation's headquarters in Manhattan and was the official residence for the United States ambassador to the United Nations and a large number of diplomatic guests.

Finally, sellers should be mindful and seek clarity on the regulations and political influences potentially impacting a buyers ability to complete a deal. With the wave of Chinese interest in H&L assets, sellers should consider if the buyer has or will receive in a timely manner any industry related or other consents and clearances required to complete the deal and pay the purchase price in a timely manner.

4. TECHNOLOGY AND INTELLECTUAL PROPERTY

Brands and innovative technology are at the heart of developing a loyal customer base in the H&L industry. How the business interacts with its customer community through online activities and with internet-based partners can be critical. These realities underscore the importance of intellectual property and technology matters in an M&A transaction in this sector. Issues to consider include:

  • Are all of the trade marks, domain names and other IP rights that are used by the H&L business owned and registered by the relevant target company being acquired? Are all of these IP rights that are used to operate the H&L businesses (e.g. bars and restaurants) registered in all jurisdictions in which the business currently operates?
  • Has the target company licensed any of its intellectual property rights to a third party (including an affiliate)?
  • Has the target company been granted any license from a third party for the use of intellectual property owned by that third party?
  • Are there any existing or potential actions, claims or proceedings in relation to the target company, the trade marks, the domain names or any other IP rights owned, licensed or used by the target company?
  • How robust in the technology and related infrastructure utilised by the target business? Loyalty programmes are an important component of branding in the H&L sector. In this context:
  • Are there any overlap issues with existing loyalty schemes buyer may own/operate; for example, are there competing car rental or airline partners?
  • Have the relevant data privacy laws been complied with in respect of the use of the individuals' personal data for the purposes of the loyalty programme?
  • Is the loyalty programme run by a third-party processor? If so, is the agreement with the third party processor adequate and compliant with relevant privacy laws? If a central database model is adopted have all relevant notifications and consents been obtained to ensure access to the database from multiple locations?

Concluding Remarks

The increasing competition for quality assets and scale in the H&L sector and the need to leverage technology to compete, present special M&A opportunities and challenges for market participants.

The matters discussed above highlight a few of the key considerations involved, and the importance of planning and process, in executing a cross-border M&A deal in the H&L sector.

Of course, there are many other areas that need to be considered especially in the context of due diligence on the management agreements entered into by the brands, employment issues, data privacy and cybersecurity issues, and other risks arising out of operational issues. There are also significant tax structuring and acquisition financing issues to consider. Mayer Brown's global teams are ready and available "at your service" to apply our cross-practice, cross-border experience to guide you through the complex M&A process and to assist you in executing such transactions successfully.

Visit us at www.mayerbrownjsm.com

Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2016. The Mayer Brown Practices. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.