Wave of Caribbean M&A shows maturing industry

A series of three large transactions, all announced 13 December, signify a maturation of the hotel industry within the Caribbean and coastal Mexico, said sources in the region.

Almost simultaneously last week, news broke of KKR and KSL Capital Partners buying Apple Leisure Group, an affiliate of TPG combining with Playa Hotels & Resorts, and Chow Tai Fook Enterprises announcing a purchase agreement for the embattled Baha Mar Resort in the Bahamas.

No prices were disclosed in any of the deals.

Ronald Sutherland, founder and president of the Hemisphere Group, said the timing of the moves is more than coincidence, and indicative of a trend.

“When you see these kind of acquisitions and joint-venture structures occurring, it shows money that has been watching this region … feels the time is right to get in and make a full-blown commitment,” Sutherland said.

George Spence, managing director of investment banking and development at Leading Property Group, said it doesn’t surprise him to see a wave of mergers and acquisitions trailing a similar wave in larger regions like the U.S.

“The Caribbean market traditionally lags the U.S. market in terms of business cycles and so forth, especially on the up side,” he said, noting that historically there has been little institutional capital working in the Caribbean.

Spence warned this might not portend another large-scale wave of deals, simply because the deals might not be out there to be had.

“There are not a lot of targets out there at this order of magnitude,” he said, noting most all-inclusive resort companies are closely held. “With both Apple Leisure and Playa, there was a business plan put in place years ago to try to reach these kinds of outcomes.”

Apple Leisure
Sutherland said the deal to buy Apple Leisure from Bain Capital was particularly important for the region, comparing its impact to that of the FRHI-AccorHotels deal earlier in the year. He said the fact that Apple Leisure controls so many different pieces of the travel journey, including hotels and resorts through its AMResorts subsidiary, makes it an interesting and exciting company.

He said it wouldn’t be surprising to see more mergers and acquisitions activity in the region to counteract Apple Leisure’s outsized influence.

“I see these players getting larger and more efficient because of their scale,” he said. “That becomes an aspirational business model. We’re at a point where big guys do really well, the small guys do really well, but those left in the middle have a challenge. I wouldn’t be surprised to see more mergers and ventures similar to that Apple example.”

AMResorts focuses largely on branding and third-party management and expects to have 61 properties open by the end of 2019.

Other subsidiaries of the group include tour operators Apple Vacations and Travel Impressions, online travel agency CheapCaribbean.com, destination managers Amstar and Worldstar, and the Unlimited Vacation Club by AMResorts loyalty program. Those sister companies help account for roughly a quarter of AMResorts’ business.

Officials from KKR declined a request for comment for this story beyond their initial announcement. Officials with Apple Leisure and KSL did not respond to requests for comment.

Spence said he thinks both the Apple Leisure deal and the Playa deal show of a maturation of the all-inclusive sector, which for a long time was dominated by family ownership or other forms of relatively less-sophisticated investors.

“Those companies represent platforms where you have multiple properties and hotels in multiple destinations with scaled and articulate management groups that understand how to reach out to capital markets and understand the trends in the all-inclusive market,” he said. “Those trends are very positive.”

Playa Hotels
Of last week’s three big deals, the planned merger of Playa Hotels and TPG affiliate Pace Holdings Corp. might be the most unique because the deal also includes plans to take Playa public.

During a call with investors to announce the deal, Karl Peterson, a member of TPG Capital’s executive committee, and president and CEO Bruce Wardinski said the deal is going to open up various avenues of growth for the company.

That is driven in large part by an infusion of capital that will allow Playa to bolster its portfolio.

“This is an opportunity to use our balance sheet to expand (our existing) resorts and add new ones,” Wardinski.

He also said the all-inclusive sector is primed to blow up, and outlined the various factors that make it a strong target for investment, including having resorts in attractive destinations that are largely insulated from supply growth issues, driving high occupancy year-round and high-margin revenues from food and beverage, spa and room upgrades.

He said Playa’s relationship with Hyatt Hotels Corporation, as the sole franchisee of the Hyatt’s two all-inclusive brands, is a particular differentiator for Playa and is poised to grow. He said more major brand relationships could be on the horizon.

“We have an opportunity to add a brand just beneath the Hyatt experience,” Wardinski said. “We’ve signed a licensing agreement, and expect to make an announcement next month.”

Baha Mar
Sources said Chow Tai Fook Enterprises’ planned purchase of Baha Mar Resort is a different beast than the Apple Leisure and Playa deals. It has the potential, he said, to breathe new life into the megaresort complex, which has missed several planned openings as continued disputes between the developer and construction company have brought things to a standstill.

The fact that CTFE has a history of working within the hospitality industry, most notably through its ownership of Rosewood Hotel Group, was a source of optimism for industry observers. CTFE also has resort developments in Australia and the Philippines, along with more than $10 billion in mixed-used development at the Greenwich Peninsula in London.

“When it opens, there will be a sigh of relief from all properties invested and the government of the Bahamas,” Sutherland said. “It will not be without challenges given its size, and it could take years to work out.”

But Sutherland praised CTFE’s “deep pockets and sense of discipline.”

In an email interview, Graeme Davis, president of CTFE’s Bahamas subsidiary, said his company was willing to invest in the multibillion-dollar resort complex, and pledge and additional $200 million into its development leading up to an April 2017 phased opening, because of the long-term growth prospects.

“Our decision to enter the bidding process to buy Baha Mar was based on our foresight for growth,” Davis said. “CTFE also has ties to Baha Mar through one of our subsidiaries, Rosewood Hotel Group, that dates back to 2011, and we saw the opportunity as a natural fit.”

He said the company has confidence both in the resort and in the growth of regional tourism. CTFE officials are hoping they can funnel more Asian travelers to the resort.

Davis did not officially say if a Rosewood brand would join the resort, but said the company is “in discussions with several globally recognized hospitality brands to be luxury hotel operators at Baha Mar including CTFE subsidiary, Rosewood Hotel Group, as well as Grand Hyatt, and SLS Hotels.”

He said recruitment for the resort will start soon.

“To prepare for the opening of the casino hotel and casino, CTFE is onboarding a leadership team of executives from internationally recognized brands,” Davis said. “It plans to begin recruiting employees for the casino in the New Year and is also in discussions to form marketing alliances with leading global gaming companies.”