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Accor's Mantra Buy Positive for Business, Leverage Impact Small
October 18, 2017 / 9:03 AM / a month ago

Accor's Mantra Buy Positive for Business, Leverage Impact Small

(The following statement was released by the rating agency) PARIS/LONDON, October 18 (Fitch) Accor SA's proposed EUR900 million acquisition of Australian-based hotel group Mantra announced on 12 October 2017 will improve Accor's business profile by strengthening its already leading position in Australia, Fitch Ratings says. We expect leverage to only increase slightly even though the acquisition will be fully funded by debt. Accor's Long-Term Issuer Default rating (IDR) of 'BBB-' has been on Rating Watch Evolving since May 2017 due to Accor's planned sale of a majority stake of AccorInvest, the company's vehicle for owning or leasing its hotel properties. By the time of completion we do not expect that the leverage increase from the Mantra purchase will have an impact on the rating. The Mantra acquisition is in line with Accor's stated strategy to grow in the Asia-Pacific region. Australia is increasingly a destination for wealthy Chinese tourists. Accor is already the biggest hotel operator in Australia, and by acquiring 100% Mantra, the number two, it reinforces its dominant position in the country with an 18% market share. Mantra had revenue of about EUR460 million in financial year ending June 2017 with an EBITDARI ("I" for Impairment) margin of 29.5%, compared to AccorHotel's 38.7% EBITDARI margin in 2016. Mantra's business model is very much in line with Accor's strategic refocusing on an asset-light management fee oriented business model as opposed to owning its properties. The planned disposal of a controlling stake in AccorInvest, expected by year end, will generate a significant cash inflow for Accor, where most financial debt is located. Accor has announced that the proceeds could be allocated to a triple combination of acquisitions, shareholder return, and deleveraging. The company's ratings remain on Rating Watch Evolving because of lack of clarify over the allocation of proceeds. The Mantra acquisition, expected to be completed in early 2018 subject to regulatory approvals, only has a small impact on leverage. We estimate that the pro-forma 2017 FFO adjusted gross leverage would be 3.5x post-acquisition, compared to 3.4x without it. About a third of Mantra's rooms are leased, giving annual operating lease expense of EUR62 million, which when capitalised by 7x, as we typically apply in Australia, compounds to the incremental leverage. The biggest challenge ahead for Accor remains the closing of the AccorInvest transaction, which could take longer than planned, or it could generate less cash than anticipated. Pro-forma FFO adjusted gross leverage, after the AccorInvest sale and including the Mantra acquisition, could reach 6.5x. Yet at the same time, Accor would have a large cash amount on its balance sheet before allocating it, which would significantly reduce the net leverage ratio. The key driver of Accor's rating therefore depends on whether it uses the cash for debt reduction, acquisitions, or shareholder returns. Fitch assumes that the company will maintain strict financial discipline in light of its publicly stated commitment to an investment-grade rating. Contact: Sophie Coutaux Senior Director +33(0)1 44 29 91 32 Fitch France SAS 60, rue de Monceau 75008 Paris Pablo Mazzini Senior Director +44 20 3530 1021 Fitch Ratings Limited 30 North Colonnade London E14 5GN Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email:; Adrian Simpson, London, Tel: +44 203 530 1010, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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