ACCOR

Company Profile

Reference Code: 4202

Publication Date: Sep 2005

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TABLE OF CONTENTS

TABLE OF CONTENTS

Company Overview ....................................................... 4

Key Facts........................................................................ 4

SWOT Analysis .............................................................. 5

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Company Overview

COMPANY OVERVIEW

Accor is one of the world’s leading hotel operators, present across all market
segments with about 3973 hotels and 463,427 rooms in 92 countries. The company is
present in 140 countries. It is headquartered in Evry Cedex, France and employs
about 168,500 people.

The company recorded revenues of E7123 million during the fiscal year ended
December 2004, an increase of 4.3% over 2003. The increase was primarily
attributable to a 6.4% increase in the company’s revenues from its upscale and
midscale hotel business. The operating profit of the company during fiscal 2004 was
E662 million, an increase of 9.8% over fiscal 2003. The net income was E239 million
during fiscal year 2004, a decrease of 11.5% over 2003.

KEY FACTS

Head Office ACCOR

2, rue de la Mare Neuve
91021 Evry Cedex
France
Phone +33 1 69 36 80 80

Fax +33 1 69 36 79 00

Web Address http://www.accor.com

Revenues/turnover (€ 7123

Mn)
Financial Year End December

Employees 168500

SIC Codes SIC 7011 Hotels and Motels

NAICS Codes 72111, 72112, 721191, 721199

Paris Ticker AC

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SWOT Analysis

SWOT ANALYSIS

Accor is one of the world’s leading hotel operators, present across all market
segments with about 3973 hotels and 463,427 rooms in 92 countries. Accor is an
expert and has innovative real-estate financing methods. However, the company
faces a continued threat from the intense competition in the hospitality industry.

Strengths Weaknesses
Innovative real estate refinancing Decline in revenues in the US economy hotels segment

Dominant position in budget hotels High dependence on the French market

Superior product mix Unbalanced revenue mix

Weak financial position

Opportunities Threats
Expansion into China and India Intense competition in the hospitality industry

Organic growth in economically mature countries Foreign currency fluctuations

Acquisition of a stake in Club Méditerranée’s Terrorist attacks and natural calamities

Investment by Colony Capital

Strengths

Innovative real estate refinancing

The way hotels groups manage their real-estate portfolio has been a defining
characteristic of their strategies for some years and Accor ranks as something of a
pioneer in structuring its real-estate financing. There are currently two schools of
thought: InterContinental’s approach, which involves not having any hotels under
ownership, so as to be able to focus on the operating side and brand management;
and that adopted by Accor and Hilton, which is to sell a portion of the portfolio and
rework the split among existing operating methods (lease, management, franchise). In
the 1990s, Accor emerged as an innovator with a series of sale & lease back
transactions, enabling it to lighten its balance sheet while still keeping control of its
products over 20 years, with buy options in the medium-term and on contract expiry.
The downside with these contracts was their reliance on fixed-rate rents greater risk

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SWOT Analysis

when the market turns down whereas the upside stemmed from the potential capital
gains from buy options based on very positive property market trends.

Accor is continuing in this pioneering vein, by signing an agreement with a pool of

investors, led by Foncière des Régions, to refinance a portfolio of 128 hotels already
under lease contract. The key aspect of this transaction is the shift from fixed-lease
contracts to all variable-lease contracts. Accor has also signed a deal with Foncière
des Régions to invest E100 million in 128 hotels, involving cash payment of E140
million to Accor, thereby ’sharing’ a portion of the potential capital gains realised by
Foncière des Régions. At the operating level, a management contract has been
signed for a 12-year period, renewable four times by Accor, thus securing the
operational aspect in the long term. This transaction is a first, with no hotel group ever
before succeeding in achieving all variable-lease contracts, without a minimum
guarantee. This new setup, which will see the proportion of fixed costs per hotel drop
from 85% to 70%, represents a genuine advance in terms of financial optimisation and
should help secure earnings when the cycle turns down. Accor has a further 900
hotels that could potentially be renegotiated. Assuming the same terms (E140 million
of cash for 128 hotels), the group could potentially receive around E700 million of
cash in the next few years as the 900 establishments currently under lease back
contract are renegotiated. The group has also said it intends to sell a number of
upscale ’s expertise and innovation in terms of real-estate management.

Dominant position in budget hotels

Accor is an international hotel operator and ranks fourth in the global industry, based
on the number of rooms. The company operates almost 3973 hotels across all
segments; of wich almost 66% of the hotels come under the economy segment and
another 29.5% come under the mid-scale segment. Its Ibis and Etap Hotel brands,
which come under the economy segment, registered highest growth rates among the
10 largest European hotel chains. Ibis is the second-largest brand in Europe. Accor
has 110,000 owned and leased economy rooms in the US plus another 20,000 under
franchise agreements. According to Lodging Econometrics, a recognized authority on
all hotel real estate in the US, there are 824,697 hotel rooms in the economy segment,
suggesting that Accor has around 13% market share in terms of owned/leased rooms
and 16% market share in terms of the brand. Accor is by far the largest owner of
budget hotels in the US, as majority of its competitors (Microtel, Super8, Econolodge,
Days Inn, Comfort Inn, Howard Johnson, Ramada Inn) are predominantly franchised
and are owned by individual owners. Thus, Accor has an edge over the competition in

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SWOT Analysis

having a major presence in budget hotels, which is known to be less cyclical than
upscale hotels.

Superior product mix

Accor has operations in 140 countries and offers a wide portfolio of products and
services. The company operates hotels in all segments, namely upscale, mid-scale
and economy. It is a world leader in travel and tourism services with its partners in the
leisure industry (Club Méditerranée), casinos (Lucien Barrière SAS), restaurants and
catering services (Lenôtre, Gemeaz Cusin, Compagnie des Wagons-Lits) and travel
agencies (Carlson Wagonlit Travel). Present across all market segments with 3973
hotels and 463,427 rooms in 92 countries, Accor is a leading operator in upscale
hotels (Sofitel), in the mid-scale segment (Novotel, Mercure and Suitehotel, as well as
the Parthenon flat hotels in Brazil) and in economy lodging, with the Ibis, Etap Hotel,
Formule 1, Red Roof and Motel 6 chains. Accor is also the benchmark brand in
services for companies and public institutions, with 19 million users in 34 countries.
From its base in meal and food vouchers, the services portfolio has been expanded to
a broad range of human resources and social program management solutions. Accor
Services is Europe’s largest corporate service provider, with products ranging from
milk tokens and incentive gifts to employee support. The company’s extensive
portfolio of products and services enables it to cater to a larger customer base.

Weaknesses

Decline in revenues in the US economy hotels segment

In the US Economy Hotels segment (which includes Motel 6 and Red Roof Inn), the
Red Roof Inn refurbishment program was stepped up, with 30 units upgraded during
the year. However, the revenues from this segment declined by 6.7% in 2004 from
E989 million to E922 million. The revenue from this segment has declined at a
compounded rate of 12.9% during the period 2002-04. The company’s lack of
presence and decline in revenues from the US, acts as a disadvantage for the
company as its largest competitors, like InterContinental and Marriott, are well
established in the US market.

High dependence on the French market

Despite a relatively diverse geographic portfolio, Accor is still heavily reliant on its
domestic market. In 2004, France accounted for 34% of total revenues and 40% of
total EBIT. In particular, the hotels business is skewed with 1319 hotels (33%) in

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SWOT Analysis

France accounting for 52% of EBIT. As a result, weakness in this market would have
an adverse effect on the company’s overall performance.

Unbalanced revenue mix

Accor’s revenue is unequally spread across its operating segments. While the hotel
revenues accounted for almost 71%, services revenues were only 7% and other five
divisions’ revenues contributed to the balance of 22% during 2004. This reflects an
over-dependence on the hotel segment, which can have a serious implication on its
overall profitability at times of adverse economic conditions.

Weak financial position

The company’s long-term debt is a very high at E3371 million as compared to an

equity of E3755 million in 2004. In addition to this, the Return on Capital Employed
(ROCE) has declined in the last five years from 11.7% in 2000 to 10% in 2004.
Though the EBIT coverage of interest has improved from 5.1 in 2000 to 5.6 in 2004,
the company’s economic value added (which essentially measures how much more
valuable a company has become during a given time period) has reduced from E278
million in 2002 to E219 million in 2004. These factors project a very weak financial
position of the company and reduce shareholder confidence

Opportunities

Expansion into China and India

Reports and research indicate that travel and tourism in India and China is expected
to grow at twice the rate of the growth in rest of the world. Currently, these two regions
combined account for 5% of international demand. This is forecast to rise to 10.2% by
2015 a CAGR (compounded annual growth rate) of 9%. Furthermore, China is
expected to become the number one tourist destination by 2015. Accor has been
present in Asia for over 30 years and is well placed to benefit from the significant
growth expected in these markets, particularly in budget hotels. To this end, the
company is earmarking E100 million for development in China alone over the next
three years. Its position is further enhanced through strategic joint ventures with some
of the largest tourism-based companies in the region. Accor has 24 hotels open in
China today and expects to quadruple this to 100 by 2010. Like China’s mid-scale and
budget brands will drive its growth in the Indian hotel market. Similar demand factors
will propel the market for these products: a growing middle class with increasingly
high levels of disposable income and cheaper air travel with the opening up of the
airline industries, and, on the supply side, a lack of clean, safe, comfortable and

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SWOT Analysis

branded hotels at an affordable price. The Indian cities are growing, consumers are
doing a whole lot of traveling and they are looking for brand experience. The company
at present does not have any hotels in India, but has plans of opening many by 2006.
Thus, Accor is well placed to benefit from growth in the Chinese and Indian markets,
with a stable of strong brands and established joint ventures with the leading hotel and
leisure operators in the region.

Organic growth in economically mature markets

The business hotel segment continued its sustained development, with a total of 8000
rooms added to the hotel base during the year. In all the company opened, 40 new
hotels in France, 20 in Germany (including the 400-room Dorint Sofitel Bayerpost
Munich and the 600-room Etap- Ibis-Suitehotel complex in Berlin), nine in Spain, eight
in Italy, six in the UK, five in Switzerland and two in Central Europe (the first Novotel in
Vilnius, Lithuania and the third Ibis in Prague, Czech Republic). For 2005-2006, Spain
has the most scheduled openings, with 20 projects underway (more than half for Ibis),
followed by the UK (12 projects) and Italy (eight). In most cases, these hotels are
owned, except in France, where they are generally operated under franchise
agreements. Thus, the company is poised to grow organically in the future.

Acquisition of a stake in Club Méditerranée’s

In October 2004, the European Commission authorized Accor’s acquisition of a

28.9% stake in Club Méditerranée. Much more than just a partnership, this equity
investment provides both companies with leverage that will enable them to fully
capitalize on the fast-growing leisure tourism market. Thanks to Club Méditerranée’s
globally recognized brand, closely related expertise and exceptional locations, the
alliance significantly enhances Accor’s presence in the leisure segment, in which it
already operates 200 establishments in 35 countries. With Accor as its leading
industry shareholder, Club Méditerranée is in a better position to pursue initiatives to
modernize and refocus its operations on the upscale, friendly, multicultural segment.
The company expects gains of E17 million in 2005, E33 million in 2006 and E46
million in 2007 (of which 16 million for Accor and 30 million for Club Méditerranée).
The three most promising areas for mutually beneficial synergies involve increasing
revenues, optimizing purchasing, and sharing skills and expertise. In addition to the
potential for synergies, the alliance between the two companies is justified for other
reasons, notably their converging interests and similarities in their approach and
behavior. As major players in travel and tourism, Accor and Club Méditerranée
operate in strategically related activities without competing. As services companies,
both are committed to satisfying customers and consider human resources to be their

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SWOT Analysis

most important asset for achieving that goal. Thus, this partnership gives the company
an opportunity to expand its presence in the leisure tourism market.

Investment by Colony Capital

The investment fund Colony Capital began working with Accor in 1998 with a series of
sale & lease back transactions. Since then, Colony has become a key partner for the
group, both for real estate financing and in partnership for deals such as that
concerning Lucien Barrière (15% of the capital is held by Colony). In 2005, Colony
Capital announced an E1 billion investment in Accor through E500 million of bonds
redeemable in shares and E500 million of convertible bonds (equivalent to a 10%
equity stake in total on conversion). This shows the confidence Colony Capital has in
Accor’s operations. This deal is strategically significant as it enhances Accor’s access
to capital, access to deals, and long-term financial discipline. In addition to being an
investment fund, Colony Capital specializes in hotels, financing, among other things,
the Novotel Tour Eiffel hotel in Paris. By investing in a range of hotel projects
throughout the world, it has developed extensive expertise of the sector. Thus, Colony
Capital also has capacity to give Accor solid investment advice. Colony Capital
investment will also enable Accor to complete an investment program originally
planned over five years in just three. Thus, this transaction will enable Accor to move
ahead more quickly with its growth plans.

Threats

Intense competition in the hospitality industry

The hospitality industry is characterized by a large number of players, with many of

them having a worldwide presence similar to Accor. There are many large hotel
chains similar to the company, such as InterContinental, Hilton Group, Marriott
International and Hyatt Corporation, who are also expanding into potential growth
regions such as Asia. Accor has 24 hotels in China, with 33 under planning stage.
Whereas, its competitor, InterContinental has the largest presence in China with 45
hotels, with plans to double the number by 2007. Marriott currently has 20 hotels in
China and aims to have 75 by 2010. Accor does not have any presence in India, but
plans to build some in the region. Whereas, InterContinental has 15 hotels in India
and Hilton has re-entered the Indian market. Thus, these under-penetrated areas hold
a major potential, however there could also be pricing pressures, which ’s margins.
Furthermore, the wide presence of independent hotels especially in the European
region holds a major potential for large chains to acquire them and thereby widen their
presence. This will increase competition and might result in a loss in revenues for the
company.

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SWOT Analysis

Foreign currency fluctuations

Accor’s hotels and services operations are spread across 140 countries, which
exposes the company to the risks of foreign currency fluctuations. With about two-
thirds of its revenues coming from international operations, its exposure to currency
fluctuations is severe. In the past the company’s revenues were severely affected due
to unfavorable foreign currency fluctuations. For instance, during 2003 the weakening
of Latin American and US currencies reduced its revenues by 4.3% over 2002. Thus,
its exposure to foreign currency fluctuation risk will continue to have a negative impact
on its overall financial performance.

Terrorist attacks and natural calamities

The tourism industry is affected by threats from terrorist attacks and environmental
calamities. The tourism industry saw a downward trend after the September 11 attack.
Though the industry has picked up since then, the recent attacks in London have
raised the fear of future terrorist attacks in major tourist destinations. Similarly, natural
calamities like the Tsunami that occurred in December 2004, affect the company, as
they result in huge losses of lives and property.

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