Like many hedge funds after

a rough October, Marcato

Capital Management could

do with a good run to see out the

year. Since disclosing a stake in real

estate company American Realty

Capital Properties at the end of

March, Mick McGuire’s fund has

seen the stock slip nearly 40%, while

a $5 million position in March.

Luckily, November has seen a couple

of promising developments for the

California-based fund. NCR Corp

has risen more than 15%, despite

disappointing earnings, since

Marcato disclosed a $308 million

investment, and granted McGuire a

seat on its board. A new campaign

to persuade Dillards to drop some

of its property into a real estate

investment trust also takes some of

the pressure off InterContinental in

the activist’s portfolio.

One that Marcato could really benefit

from doing well on is InterContinental

Hotel Group. If the activist’s stake,

initially 3.8% of the outstanding

shares, has remained constant since

it first commented on the situation in

late May, it will be worth £232 million

($363 million). Given that Marcato

thinks shares could be worth more

than double their current price, a

successful campaign could be better

than Thanksgiving and Christmas

rolled into one.

If that is one reason for urgency,

Marcato gives plenty more in its

latest presentation on the stock,

released on November 11. Now is

an “extremely favorable” time for

the hotel sector, it says, with strong

demand and several new markets

opening up to Western chains.

But most important to the activist’s

design is the strong headway in

cross-border M&A transactions.

With one exploratory approach for

InterContinental reported earlier

this year, Marcato has decided that

the time is ripe to put the company

in play. To that effect, Marcato has

hired PR firm Sard Verbinnen and

boutique investment bank Houlihan

Lokey, a specialist in real estate

transactions and no stranger to

the activist space, having advised

Barington Capital Group on its white

paper at Darden Restaurants.

Houlihan has narrowed the shortlist

of desirable suitors down to six

hotel chains; Wyndham, Starwood,

Hyatt, Marriott, Hilton and Accor.

Marcato says a combination with

Intercontinental Hotels Group

Industry Lodging

Sector Services

HQ Denham, UK

Market cap £ 6.21 bn*

Exchange LSE

Ticker IHG

* accurate as of 24 November, 2014

Intercontinental Hotels Group

16

Now is an extremely favorable time for the hotel

sector, Marcato says”“

“any of these strategic partners” has

the potential to add global scale,

produce revenue synergies and

long-term earnings accretion.

Several factors are likely to come

into play, with InterContinental

offering all of the six potential

partners an opportunity to lighten

their asset base, generate synergies

and expand into China. Marcato

estimates cost synergies at $150-

200 million for all potential partners,

with the exception of Hyatt, which

would likely generate synergies of

$75-125 million.

Greg Johnson, an analyst at Shore

Capital who covers the stock, says

the potential for synergies is real,

but doubts that other hotel chains

will see an acquisition as the best

way to broaden their asset base

in emerging economies, given the

significance of InterContinental’s

Holiday Inn chain within its asset mix.

Other operators “might be better off

growing organically,” he says.

Another analyst, who preferred not

to be named in this piece, said a

market-dominating loyalty rewards

scheme could overcome these

restrictions, but questioned whether

a debt-funded takeover would put

a combination in a good position

near the top of the hospitality sector

market cycle.

“Every investment bank in the

world has probably looked into

whether this deal makes sense,”

the analyst said. But concerns over

the potential costs of the merger

meant InterContinental was unlikely

to make a move itself, while it could

just as easily fund a campaign of

giveaways to shareholders with

asset sales. Indeed, a $750 million

special dividend announced in April

has already contributed to a surge in

the stock price, and will likely make

for healthy returns for Marcato.

Furthermore, the company has been

hosting a series of meetings with

investors and analysts at which it

enjoys pointing out inaccuracies in

Marcato’s presentation, although it

hasn’t gone public with the criticisms

yet.

The same analyst thinks

InterContinental is far from

vulnerable, with shareholders still

enjoying the fruits of organic growth

and the stock up nearly 23% for

the year. “This is a highly respected

management team, and other

shareholders are quite happy with

them.”

The model for the trade is Burger

King’s recent tax-inversion deal with

Canada’s Tim Horton’s – stocks held

by McGuire’s alma mater, Pershing

Square Capital Management. As

Marcato has argued, “This lauded

merger has striking similarities to the

opportunities we believe are currently

available [to InterContinental].

InterContinental, for its part, isn’t

likely to play along. In a statement,

it said that after two meetings with

“ANY OF THESE PARTNERS HAS THE POTENTIAL TO ADD SCALE AND PRODUCE SYNERGIES”

17

May 29, 2014

Marcato reveals a 3.8% stake in InterContinental, and urges the company to sell itself, after the company reportedly rejected an unsolicited bid.

August 4, 2014

Marcato reveals it has retained the services of Houlihan Lokey to find a buyer for InterContinental Hotels Group.

November 11, 2014

Marcato releases Shareholder Letter and Presentation repeating its request for IHG to sell itself.

August 6, 2014

Intercontinental’s CEO Richard Solomons reveals that he has recently met with Marcato, however his focus remains on improving the company’s financials rather than a sale.

November 25, 2014

The CEO of Accor, a French hotel chain, hints that a partnership with Intercontinental is not part of his strategy.

June 6, 2014

InterContinental reveals that it is to pay shareholders a special dividend of $2.93 (£1.74) per share.

Marcato’s campaign Intercontinental Hotels Group: a timeline

This is a highly respected management

team, and other shareholders are quite happy with them”“

Marcato in September and October,

it said it intended “to continue

to pursue its current strategy for

high quality growth and delivering

strong operational and financial

performance.”

For its next steps, much will depend

on whether Marcato can convince

one of its magnificent six to bid

for InterContinental. To date, there

hasn’t been a formal bid, despite the

interest expressed in March.

And with the Euro continuing to

weaken against the Dollar, it might

be asset-heavy Accor that finds

itself having to entertain suitors.

The French chain is performing well

under relatively new CEO Sebastian

Bazin, but if a sale could be financed

with an immediately sale-leaseback

of some of its real estate, it could

prove more attractive than a debt-

laden InterContinental.

InterContinental’s London listing

provides options—if Marcato

increases its stake or joins with

other actors to create a holding of

more than 5%, it can requisition a

meeting—but takeover efforts on

two fronts are frowned upon in the

City, with its restrictive takeover

code. That means that if a bid does

emerge and the company resists,

Marcato could find itself on the

sidelines with a tight window of

opportunity.

McGuire’s mentor, Bill Ackman, has

specialized in putting companies

into play with hostile campaigns.

One proxy solicitor, who preferred

not to be named, said of Marcato’s

campaign “This was a planting of

their flag... If they don’t get more

widespread support they will put at

least one candidate up for the board

at the next meeting.”

IHG Snapshot

52 week high 2648 p *

52 week low 1999 p *

Share price 2626 p *

P/Sales 25.38 **

* accurate as of 24 Nov, 2014** trailing 12 months, accurate as of 30 Jun, 2014

Source: Capital IQ

Hospitality for investors, but no rest

“MCGUIRE’S MENTOR, BILL ACKMAN, HAS SPECIALIZED IN PUTTING COMPANIES INTO PLAY”

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1000000

2000000

3000000

4000000

5000000

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01 April 2014 01 October 2014

Volume Closing share price (£)

Marcato reveals a 3.8% stake in InterContinental, and urges the company to sell itself

IHG announces intention to pay $750mn special dividend

IHG issues circular to shareholders confirming special dividend and associated share consolidation

Ex-dividend date

Marcato hires Houlihan Lokey to find a buyer for IHG

IHG CEO Richard Solomons reveals his focus remains on improving the company’s financials rather than a sale IHG receive

binding offer for Intercontinental Paris-Le Grand of €330mn from Constellation Hotels Holding Limited

Marcato reiterates demand for IHG to sell itself but the issuer maintains its outlook

Hotel Room

Count

Mkt cap

($mn)

Similar asset-

lite strategy

Potential for Chinese

market leadership

Synergies

(% G&A)

Impact on

mkt cap*

Marriott 696,926 21.2 Yes Yes 14-19 96.5%

Hilton 693,980 24.4 Yes 19-26 134.4%

Accor 470,878 10.9 Yes N/A 61.0%

Starwood 349,570 14.6 Yes Yes 20-26 81.7%

Wyndham 650,200 10.2 Yes Yes 14-18 38.3%

Hyatt 149,640 9.5 No 11-19 155.3%

Of six potential bidders identified by Marcato, Hyatt or Hilton would have the biggest

immediate impact, though Hyatt has a smaller presence in the emerging Chinese

market.

* Estimated by Marcato; includes impact of tax savings but not EPS synergies.

If they don’t get more widespread support,

they will put at least one candidate up for the board at the next meeting”

“

2800

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Marcato’s preferred partners for IHG