French hotel company Accor announced Tuesday that it has plans to sell its low-cost chain Motel 6 to Blackstone Group (NYSE:BX) for $1.9 billion. This sale is an effort for Accor to cut debt and shift their efforts away from the U.S. toward high-growth emerging markets. They plan to use a portion of the proceeds from the sale to cut the company's debt by approximately EUR330 million. Other proceeds will be used to expand into growing markets such as the Asia-Pacific region and Latin America. Accor is also seeking to shift to a franchise model similar to that of competitor InterContinental Hotels Group (NYSE:IHG). They expect this move to result in fewer revenue swings by partnering with the owners of the hotels as opposed to owning them directly.
InterContinental Hotels has profited extensively from the franchise model. Their Holiday Inn brand was the first franchised hotel brand. Franchising is now the largest part of IHG's business, accounting for 3,852 hotels franchised under the spectrum of IHG brands. IHG now owns less than 1% of the hotels in its portfolio outright. As the franchiser IHG invests no capital into the hotels other than knowledge, branding, and support. In return they receive a percentage of each room's revenue. The franchise method has turned out to be a great boost to their business, helping IHG to run the brand while someone else runs the actual business.
Blackstone, which will be purchasing the Motel 6 chain from Accor, is one of the world's leading and investment advisory firms. Though no specific plans have been mentioned for Motel 6, one can only assume what this will mean for the chain. Accor has stated that it will report a slight loss resulting from running out the existing lease agreements on some of the Motel 6 properties. One can only assume this to mean that Blackstone will, in fact, not be operating the low-cost chain themselves. Not that one would expect them to.
The market has reacted well to the news of this sale. Accor's share price increased by 4.5% early Tuesday morning. Apparently investors agree with this move. It is a smart choice for Accor. Let go of an under-performing entity and focus your attention on where the growth potential is. After all, who puts their money on the losing team?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.