Into the unknown
Hospitality shares fell immediately after the attacks on the World Trade Center and the Pentagon. As Gerald Donagher reports, the City is divided about the long-term impact on individual companies and the whole industry.
The money men in the City know from personal experience that the hotel business is going through a difficult period. One fund manager, on a trip to the Continent, forgot to book a London hotel room for the outward leg of his journey. Just a few weeks ago, that could have forced the cancellation of the entire trip. Now, travelling after the terrorist attacks, he not only booked the room on the day of travel, he was able to enjoy luxury on the cheap - securing a suite in a Park Lane hotel for just £120 a night.
But while they're enjoying the hotel bargains, professionally they're punishing the hospitality industry. In the fortnight after the terrorist attacks on New York and Washington, hospitality stocks on the London market lost a quarter of their value on average. European stocks also fared badly: the main index of hotel shares on the Continent fell by about 15%.
All hotel and hospitality stocks fell, but the worst sufferers were the companies with major operations in the USA. Millennium & Copthorne - which owns four hotels in New York, including the Millennium Hilton, 200 yards from the ruins of the World Trade Center - saw its shares lose more than a third of their value. Shares in London Clubs International, which have already been shredded this year by continuing losses at its Aladdin hotel and casino in Las Vegas, lost another 60%.
The flow of bad news from the sector immediately after the terrorist strikes sent investors fleeing from hospitality stocks, and some of the City's company watchers are warning that they'll stay away.
Mark Reed, one of the hotel and leisure analysts at the stockbrokers Teather & Greenwood, says hotel share prices will continue to fall - even though they've dropped sharply already.
"There is going to be a long period of high tension and instability, and that's not good for travel and hotel companies," he says. "We were going into a slowdown anyway, and the events of 11 September have made it a lot worse."
Other analysts, though, say the share price falls have been caused by uncertainty, rather than concern about the fundamental profitability of the industry. One of the oldest rules of the City is that the markets celebrate good news, accommodate bad news but cannot cope with the unknown. The conventional wisdom among most company-watchers is that hospitality share prices will rise when there is a visible start to the war on terrorism.
"The historic precedent is the Gulf War," says Nick van Marken, hospitality consulting partner at Andersen. "Stocks came off by 25% to 30% at that time, but came back quickly when the war started. The minute there was some sort of action, the markets said ‘we understand what's happening', and stocks rose."
"These things are incredibly cyclical," says Justin Urquhart Stewart of the private wealth management company 7 Investment Management. He is telling his clients "the best time to check into hotel shares is when everyone's checking out of hotels." The recovery in stocks may be some months off, though. "Expect that to occur in the second quarter of next year," he says.
But it may not be as clear-cut as all that. As the crisis develops, some companies will suffer more than others, depending on their business mix.
In a recent report, hospitality analysts at the city firm Credit Suisse First Boston named Thistle Hotels as one of the chains likely to suffer most in terms of revenues and profits. This is because 70% of its earnings are in London, it owns its hotels, and it is wholly dependent on hotel business for its income. By contrast, they said, Six Continents - the old Bass group - and Hilton were less sensitive to the aftermath of the World Trade Center attacks.
Credit Suisse analysts believe food service companies will feel little direct impact from the events in the USA, but will suffer from the economic slowdown. They estimate Sodexho, with 16% of revenues in the US corporate market, will suffer more than Compass, with 10% of business from US companies.
They also say it's too early to judge the impact on cruise ship companies. After the Gulf War, cruise companies that specialised in Caribbean holidays benefited, as Americans cancelled their Mediterranean breaks. This time the City fears Americans may decide not to go on vacation at all.
There are also worries that some very small companies - weakened by the fall in their share prices - may not have strong enough finances to weather the storm.
"Hotel groups with a large amount of borrowings may run into problems," says Geoff Miller, a senior fund manager at the Exeter Investment Group. Others are also warning that the weakest of the litter may not survive.
"It's not going to cause a problem for many companies, but some smaller companies may face financial collapse," says Leonor Stanton, a leisure team director at accountancy firm Deloitte & Touche.
That could lead to another round of consolidation in the industry.
"After a while there will be some buying opportunities," Stanton says.
Exeter Investment's Miller explains: "The companies that have been particularly successful in the past few years were those that had cash to spend on hotel companies after the 1990 downturn. There could be big opportunities again for those with cash."
The company most analysts expect to expand is Six Continents. It has the money, the inclination - and now, the opportunity.
"Six Continents has quite a strong balance-sheet, and it has been a acquirer of hotel companies in the recent past," says Rick Dentith, head of UK equities at Royal London Asset Management. "They've said publicly they want to expand, so I think it's likely they'll try something," he says.
The company, though, is expected to allow a respectful pause before it strikes.
Other business activity is likely to be put on hold. Analysts say this is not the time for companies to go to the markets in search of new cash. Immediately after the terrorist strikes, Hilton put a planned sale of new debt on hold, postponing the issue of euro bonds, expected to raise a1b (£625m) for the company.
Sale-and-leaseback deals are also likely to come under review. There's no question of existing deals being re-negotiated, but any future deals may see the banks exact much tougher terms. "Previous deals were based partly on turnover," says Teather & Greenwood's Reed. "Knowing that turnover is now going to be more volatile, the banks may want a larger share of it."
Company restructurings may also have to go on ice. City Centre Restaurants' plans to cut its debts by selling off its 14 Wok Wok restaurants are almost certain to be disrupted if US tourists stay away from London.
But despite the uncertainty, the hospitality industry is regarded as being in better shape now than at the time of the outbreak of the Gulf War - and likely to recover more quickly this time.
"The lower share price need not cause companies a problem," says Stephen Furlong, leisure analyst at the Dublin-based brokers Davy Stockbrokers. "This is a short-term market reaction, and in the longer term there's going to be an upside in prices. Companies shouldn't be too concerned."
Stocks on the slide
Performance of hospitality and leisure stocks on the FTSE All Share index in the fortnight after the attack (excluding fitness clubs & entertainment companies) (source: Bloomberg)Wolverhampton & Dudley -2%
Wetherspoon -3%
Enterprise Inns -5%
Regent Inns -5%
Greene King -5%
De Vere Group -10%
Yates Group -14%
Luminar -15%
Macdonald Hotels -16%
Whitbread -17%
PizzaExpress -18%
Six Continents -19%
Thistle Hotels -20%
SFI Group -21%
Jarvis -21%
Hilton -23%
Compass -24%
Queens Moat Houses -24%
City Centre Restaurants -28%
Millennium & Copthorne -35%
First Choice Holiday -35%
Airtours -48%
P&O Princess -50%
London Clubs International -58%
Average performance of sector -24%
