We recently wrote a note on our investment thesis surrounding Mantra, Australia’s second largest operator of hotels and resorts. At the time, we outlined some of the secular trends and company specific catalysts which made it attractive to us as an investment. The core thematic which attracted us to Mantra was the consistent and well above average GDP forecast growth that Australia’s tourism industry was expected to experience. This was to be driven by the massive growth of China’s middle class (upper middle class projected to grow from 14% 2012 – 54% 2022) and subsequently their disposable incomes. Mantra’s overweight exposure to the east coast of the country, major destinations for Chinese tourism, was one of the main attractions from a company specific standpoint.

Figure 1. China total outbound tourism spend
Source: World Tourism Organisation
Earlier this month Accor P.A., a French multinational hotel group with operations in 95 countries, made a $4.02 ($3.96 ex-dividend) all-cash bid for Mantra’s shares – representing a 23% premium to the closing price of the previous day. This bid includes the potential for a fully-franked special dividend of up to 23.5cps. Accor has previously been attracted to Australian hotel assets, attaining exclusive marketing rights for the Mirvac Hotel & Resorts brands in 2011, of which it rebranded the majority of them as Pullman Hotels. This deal represents the French company’s biggest foray into the Australian market, adding Mantra’s 125 properties across Australia, New Zealand, Bali and Hawaii to its portfolio.
The scheme of arrangement that has been entered into between Mantra and Accor sets out the following:

  • All-cash bid of $4.02 (including already paid final dividend, thus $3.96 final price)
  • Mantra board have been approved to pay a special dividend in the event of the takeover being agreed to, which has been indicated to be up to 23.5cps
  • The scheme is subject to approval of the Federal Court, FIRB and ACCC.
  • Scheme booklet will be dispatched to all Mantra holders in February 2018
  • Shareholder vote and implementation of scheme in March 2018

In terms of the various approvals that Mantra has to jump through to approve the takeover, we see minimal chance of the deal being turned down. The ACCC will likely put the most scrutiny on the deal, although given the highly fragmented nature of the hotel market in Australia (Mantra 2nd largest operator at 7% market share), we do not see competition concerns being contentious. Worst case we believe the ACCC orders a slight carve out of certain properties in cities where the combined groups market share is higher, for example, in the Gold Coast.
There has also been some speculation in the media and from some of the covering brokers of Mantra about the possibility of a competing bid emerging in the coming months before the shareholder vote. Some of this centres on an article in The Australian which suggested there were multiple suitors sizing up the company in as early as March. As mentioned, the Australian hotel market is quite fragmented, with the top five operators controlling 29% of rooms in the country vs. 48% in the U.S. To an international conglomerate, Mantra represents one of only a few sizeable targets with a notable market share and geographical footprint in a country with low political risks and favourable inbound tourism trends. Whilst the price that Accor is paying is not particularly aggressive on a P/E basis, the ownership structure for its properties is not as attractive as other hotel operators. Whilst there is a small chance of a counter-bid materializing, we believe it to be more likely that the bid goes through in its current form.
Given our firm view that the deal will go ahead, the slight upside still presented in the market and the large amount of franking credits on offer and slight chance of a competing offer, we plan to continue to hold our position in Mantra until the deal is finalised.
 
Clime Asset Management owns shares in Mantra Group Ltd (MTR:ASX)