Sol Melia acquires Innside

Sol Meliá increased net profits for the first nine months of 2007 by 16.1% in net profits to 141.9 million euros, and also announced the purchase of the German hotel chain Innside. The other four hotels will be added between 2008 and 2010 in Vienna, Berlin, Dresden and Düsseldorf.

This strategic acquisition allows Sol Meliá to significantly increase its presence in Germany, its third most important feeder market and one of the strongest economies in Europe, from 16 to 28 hotels. The portfolio will be strengthened not only in quantity, but also in quality. In line with the modern hospitality concepts pioneered by Sol Meliá, all of the hotels are new (none more than 5 years old) and located in the heart of the city centres, combining modern design, cutting-edge decoration and superior quality facilities and services.

The chain is perfectly aligned with the company strategy of increasing brand equity, and the incorporation of the highly experienced Innside management team within Sol Meliá also boosts the capitalisation of the company through the promotion of talent throughout the organisation.

This important operation to increase Sol Meliá presence in major German cities involves an investment of 16.5 million euros at an EBITDA multiple (Earnings before interest, taxes, depreciation and amortisation) of x6, a price which is perfectly in line with Sol Meliá policies for acquisitions of hotel leasing companies which set an EBITDA multiple limit of x7.5. The multiple is higher for acquisitions of hotel management companies or for privately owned hotels.

Performance and outlook

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In the first nine months of the year, Sol Meliá achieved revenues of 1,022.1 million euros, an increase of 6% over the same period in 2006, while EBITDA rose to 271.4 million euros, an increase of 2.3%. Net Profit grew by 16.1% to 142 million euros.

The key figures are significantly higher if asset rotations are excluded for the period, with revenues rising by 7.5%, EBITDA by 8.2% and Net Profit by 23.1%.

The positive results are explained by the chain as due to the strong summer season in Spanish mainland and Balearic Islands hotels, and the excellent performance in the Dominican Republic. City hotels all over the world have also performed well all year, and excellent progress has been seen at Sol Meliá Vacation Club, where revenues have grown by 29% in the first nine months of the year leading to EBITDA growth of 51%.

Mexico was affected by Hurricane Dean, while the Canary Islands continued to perform less dynamically than in previous years, although certain factors indicate that the destination could be on its way back to recovery given the growing presence of low-cost airlines and the promotional efforts promised by both the private sector and local administration.

Hotel disposals: exceeding objectives

In the area of asset rotation, the company has closed agreements for the sale of five hotels in the fourth quarter (three in Spain and two in Europe). Added to the sales already made, this will allow the chain to close the year with revenues from disposals of 130 million euros, exceeding the commitment to sales of at least 100 million euros for the full year.

Sol Meliá has sold these assets at an EBITDA multiple of x18; a value in line with the recent asset valuation made for the company by Richard Ellis and American Appraisal which raised the objective value of company shares to 27.7€ based on company assets and is highly satisfactory when compared to the x6 multiple for company acquisitions.

30 Meliá hotels being renovated

Sol Meliá also continues to work on the renovation of the flagship Meliá brand involving an investment of 300 million euros and affecting 30 hotels, including such emblematic properties as the Meliá Madrid Princesa, Meliá Galgos (Madrid), Meliá Barcelona, Meliá de Mar and Meliá Palas Atenea (Mallorca), Meliá Sevilla, Meliá Colón (Seville) and Meliá Sol y Nieve (Sierra Nevada). This renovation aims to provide a better response to current market demand and future trends, and will affect 2,500 hotel rooms in 2007 and 2008.

The thorough renovation of the Meliá brand is an extension of the work already done in the Sol and Tryp hotels in recent years. After creating such innovative hotel concepts as Me by Meliá or the luxury Paradisus Resorts in the Caribbean, the chain will now work on these and other lines to consolidate the position of each of the brands as a market leader in each of the different market segments in the global hotel industry, developing the superior service concepts that have always been the trademark of the company into a wider view of the global customer experience based on their different natures and expectations.

Diversification and strengths

Finally, and in summary, the company highlights strong points such as the solidity of the company’s leisure business and the favourable outlook for hotels in major European cities, both trends which point towards sources of stable growth.

Confidence in Sol Meliá is also raised by company diversification both geographically and in business areas. With regard to globalisation, Spanish guests now make up only 31% of total guest numbers, while in regard to diversification in business areas, the company is beginning to see a growing contribution of the Vacation Club to company EBITDA.

Together with these factors, the positive financial situation of Sol Meliá, the only Spanish hotel chain to be rated with maximum financial solvency (Baa3) by the Moody’s credit rating agency, is seen as a guarantee that company shares will recover their previous performance in the markets once the effects of the high-risk mortgage crisis recede.

The latest buy recommendations released this week by companies such as Deutsche Bank, Banco Santander or Caja Madrid, together with the investment opportunity the current share price has created after the market correction seen in recent weeks, are positive pointers towards the future growth of the share price.
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