Since Bloomberg reported Monday that Hilton was in talks to acquire Graduate Hotels, neither group has confirmed the rumor.
“I'm not going to comment on market rumors and speculation,” said Hilton President and CEO Chris Nassetta, in the company’s fourth-quarter earnings call Wednesday morning.
Nonetheless, experts say there are several reasons why a Hilton and Graduate Hotels deal would make sense.
Hotel Dive spoke to industry experts about possible motivations behind acquisition talks and why brand acquisitions have become a key part of many hotel companies’ growth strategies.
The appeal of Graduate
There are currently 37 Graduate Hotels, which include four in various stages of development. The brand’s hotels are largely in college towns in the U.S. (with the exception of two properties in the U.K.), which could offer Hilton access to a unique market.
Hilton can leverage its brand power to attract more college students, who will soon become frequent travelers, turning them into Hilton's future loyal customers.
Linchi Kwok
Professor of Hospitality Management at Cal Poly Pomona
Sooho Choi, sector leader for travel, hospitality and leisure at professional services firm Alvarez & Marsal, said a deal could offer “significant potential value for both parties.”
If Hilton were to acquire Graduate Hotels, it would gain “an edgy, differentiated and hard to replicate brand poised for significant growth,” he added.
“While Hilton has primarily grown their own brands, the 37 hotels in the Graduate portfolio is sizable enough to act as a launching pad while small enough to be able to efficiently bring in alongside the existing Hilton family of brands,” he said.
In recent years, Hilton has developed several brands of its own. The most recent, extended stay brand LivSmart Studios, got its official name last month. The company also opened the first location of its lifestyle brand, Tempo by Hilton, in Times Square last summer. And it’s pushing expansion for its convention hotel brand, Signia by Hilton, which opened its flagship hotel in Atlanta last month.
“Consumers want a unique travel experience with a local flavor while appreciating the consistent service quality a hotel chain offers,” said Linchi Kwok, a professor of hospitality management at Cal Poly Pomona. “Hotel chains respond to such a travel demand by introducing new boutique and lifestyle brands.”
With their college town positioning, Graduate Hotels can offer the unique local experiences travelers crave, Kwok said, adding, “Hilton can also leverage its brand power to attract more college students, who will soon become frequent travelers, turning them into Hilton's future loyal customers.”
Eric Rubino, principal at hospitality consultancy Extreme Hospitality, echoed the sentiment, noting that Graduate Hotels would allow Hilton to “strengthen its portfolio and market penetration in the boutique brand segment.” And John O’Neill, professor and director of Penn State’s Hospitality Real Estate Strategy Group, said hotel business in university towns is “more stable.”
“[I]t fluctuates less than both similarly sized towns, and compared to national averages. That stability is in terms of both occupancy percentage and average daily rate, and means hotel investment in university towns is relatively low risk, all things considered,” he said. Not to mention, he added: “Universities almost never close — that's true even during COVID.”
Graduate Hotels, on the other hand, could also stand to benefit from the “scale, sibling brands, well-regarded technology, distribution capabilities, and operations experience that Hilton brings,” according to Choi.
The power of brand acquisitions
In its recently published 2024 Global Hotel Investment Outlook, JLL Hotels & Resorts forecast that, as global hotel development slows, brand acquisitions and consolidation will become increasingly appealing ways to drive shareholder value.
According to O’Neill, Hilton is “in an arms race to increase their scale by offering more brands to effectively compete for hotel franchisee-owners against massive competitors like Marriott who acquired Starwood, and Choice who wants to acquire Wyndham. Having more brands allows hotel franchisors to better compete for guests too.”
Acquiring a brand, however, can be easier than developing one in-house.
“Introducing a new brand is costly, but acquiring a brand that has already gone through its initial validation phase can be far more economical,” said Afshin Kateb, CFO and head of hospitality investments at Palladius Capital Management. Kateb pointed to other examples in recent years — such as Hyatt’s 2018 acquisition of boutique hotel company Two Roads, which enabled the company to create a dedicated lifestyle division.
Acquiring a pre-existing brand is also in line with what many companies call their “asset-light business model,” which sees hotel groups manage and franchise hotels without owning them, reducing the group’s capital investment, according to an article by University of Hawaii Professor Kwanglim Seo in the Boston Hospitality Review.
In 2020, for example, Hilton operated 1,019,287 rooms. Some 999,887 of those — or 98% ‒ were managed or franchised by another party, according to the article by Seo.
Though neither Hilton nor Graduate Hotels has since confirmed, sources told Bloomberg that the potential deal would exclude Graduate Hotels’ real estate, which would “fit into Hilton’s asset-light brand-centric approach,” according to Choi.
When asked in the Wednesday earnings call about Hilton’s stance toward mergers and acquisitions, CEO Nassetta said, “our attitude on M&A is really the same as it's always been.”
“Never say never, but we have a very tough filtration system,” he said.
