PARIS — Everybody wants experiences — and LVMH Moët Hennessy Louis Vuitton wants to make sure it’s ready to provide them.
The luxury giant’s surprise $2.6 billion acquisition of Belmond is aimed at bulking up the group’s hospitality operations globally and position it as much of a leading player in experiential luxury as it is in fashion, leather goods and prestige wines and spirits.
There is plenty to play for. Luxury hospitality is forecast to generate revenues of 190 billion euros in 2018, up 5 percent at constant exchange, representing 16 percent of the global 1.2-trillion-euro luxury goods market, according to management consulting firm Bain & Co.
Luxury hotels, which accounted for 87 percent of Belmond’s revenues in 2017, are expected to see positive growth, evolving into social venues in sync with the city as travel becomes a “state of mind,” according to the Bain & Co. Luxury Goods Worldwide Market Study released last month.
Euromonitor International forecasts luxury hotels will generate revenues of $53.5 billion in 2018, up from $39.3 billion in 2013, and the compound annual growth rate is expected to accelerate to 4 percent between 2017 and 2022.
“With the rise of experiential consumption, travel is an industry in which many consumers are willing to trade up. Hotels are clearly benefiting from consumers trading up from midmarket to luxury,” Fflur Roberts, head of research luxury goods at Euromonitor, commented in a recent article.
“Whilst consumer interest in luxury travel shows no sign of slowing down, it will be less about showing off wealth, and more about what consumers find meaningful. Wise luxury travel brands should continue to incorporate a wellness and ethical angle in their products and services to drive consumer interest,” she added.
The acquisition was unexpected, as luxury titan Bernard Arnault said recently he was not interested in snapping up assets while stock markets were riding high. However, analysts said the deal makes sense as Millennials increasingly choose to spend on experiences rather than ownership of goods.
Jean-Jacques Guiony, chief financial officer of LVMH, said the deal was motivated not by a lack of available targets, but by an underlying industry trend. “The future of luxury will be not only in luxury goods, as it’s been for many, many years, but also in luxury experiences, and we want to be in both segments,” he said.
“We think the so-called experiential luxury is something that will be important in the future and it’s a great opportunity that we have to participate into that with such high-quality assets as Belmond,” the executive said in a conference call.
To that end, LVMH plans to offer the kind of experiences that are already available in its Cheval-Blanc properties in Courchevel, St. Barths, the Maldives and Saint-Tropez, Guiony said. LVMH also owns the Bulgari hotel properties.
“It’s very clear that there is a lot of cross-fertilization that we can promote between our wines and spirits business and Belmond. Some of the luxury hotels also have boutiques of luxury brands, so that’s another fairly obvious avenue. Client events: both Belmond’s clients or brands’ clients could be [hosted] in each other’s locations,” Guiony said.
Belmond owns luxury properties ranging from the Venice Simplon-Orient-Express train to ritzy hotels including the Cipriani in Venice and the Copacabana Palace in Rio de Janeiro.
“Belmond delivers unique experiences to discerning travelers and owns a number of exceptional assets in the most desirable destinations,” Arnault, chairman and chief executive officer of LVMH, said Friday. “This acquisition will significantly increase LVMH’s presence in the ultimate hospitality world.”
LVMH has agreed to pay $25 per class A share in cash, representing an equity value of $2.6 billion in a transaction with an enterprise value of $3.2 billion. This implies a 41.6 percent premium to Belmond’s closing price on the New York Stock Exchange on Thursday.
Founded in 1976, Belmond operates in 24 countries with a portfolio of 33 luxury hotels, three safari camps, seven passenger train lines and two river cruise properties. It also owns the 21 Club, a former Prohibition-era speakeasy turned restaurant and bar in New York City.
The London-based group posted adjusted earnings before interest, taxes, depreciation and amortization of $140 million on revenues of $572 million in the 12 months ended Sept. 30.
Roland Hernandez, chairman of the board of Belmond, said the company had received offers from “a wide range of real estate and lodging companies, sovereign wealth institutions and other financial buyers around the world.”
“The board has concluded that this transaction with LVMH provides compelling and certain value for our shareholders as well as an exciting path forward with a group that appreciates Belmond’s irreplaceable assets and strong management team,” he added.
Formerly known as Orient-Express Hotels, the company changed its name to Belmond in 2014. “Belmond is an emerging brand and we strongly believe that we can continue to develop it and to make it in its own segment as desirable and recognizable as any other brand that we manage within LVMH,” Guiony said.
“The priority is to develop the brand, to improve the profitability of these exceptional properties and to nurture collaborations with the other LVMH brands,” he added, adding that marketing efforts were already underway to increase the share of Asian clients in Belmond’s customer base.
The executive said LVMH is “extremely confident” in Belmond’s existing management team and is keen to maintain and grow the group’s stable of exceptional properties, which also include the only hotel located at the entrance to the ancient Inca citadel of Machu Picchu.
“Don’t expect on our side any financial reshuffle that would cause us to dispose of the real estate and keep the operations,” Guiony said. “If we have hotel management agreement opportunities, we will obviously look at them, and if we end up having opportunities to enlarge the portfolio of owned assets, why not?”
Indeed, LVMH already has some major projects in the works with its existing brands. It plans to open a Cheval-Blanc hotel in Paris in 2020 as part of its long-delayed renovation of landmark Paris department store La Samaritaine, as well as new Bulgari hotels in Paris and Moscow in 2020, and in Tokyo in 2022.
Last year, Stephanie Watine Arnault, the niece of Bernard Arnault, launched Clos 19, a new online platform for wine, spirits and Champagne incorporating elements of music, art, food and travel.
LVMH has yet to finalize how it will fund the acquisition, which is expected to close in the first half of 2019, subject to approval by Belmond’s shareholders and clearance by competition authorities, Guiony said. However, the transaction should have little impact on its debt level, he said.
Analysts applauded the acquisition.
“While some investors may question the acquisition, which appears to lie outside LVMH group’s core operations, we believe it is consistent with its long-term strategy focused on offering the consumer a full spectrum of luxury experience,” analysts at Berenberg Bank said in a research report.
The offer price represents 1.6 percent of LVMH’s market capitalization, according to Rogerio Fujimori, analyst at RBC Capital Markets. “While the deal multiples may look optically high, we should remember that Belmond owns a unique portfolio of trophy real estate assets,” he said in a report.