Why did Accor buy Club Med?

The deal was sealed hours before Umberto Agnelli died on May 27th. The Agnelli family had long denied that it planned any retreat from Club Med. But strapped for cash, and with a willing buyer, the family obviously changed its mind, agreeing to sell most of its stake in the chain of more than 100 holiday resorts to Accor, Europe's biggest hotel business with over 4,000 hotels worldwide. On June 11th Jean-Marc Espalioux, Accor's boss, said he would take control of Club Med by buying most of the Agnelli shares and the entire stake of Caisse des Dιpτts et Consignations (CDC), a French state-owned manager of public pension funds. Accor's share price promptly tumbled, as analysts expressed mystification—and competitors delight - at the deal.

The Agnellis need money to nurse Fiat, the car group upon which their wealth is based, back to health. Accor is paying more for their Club Med shares than they can reasonably have expected. (They would have sold their entire stake had Accor made an offer.) CDC's motives are less apparent, at least to those unaccustomed to the workings of French capitalism. A shareholder both of Accor and Club Med, CDC was keen to keep Club Med in French hands. (A foreign buyer had apparently been interested.) To help Accor finance the acquisition, CDC underwrote a 280m Euro ($338m) convertible-bond issue in return for an increase in its stake in Accor from 4.5% to 8%.

Why is Accor betting on a loss-making company in an industry that is barely showing signs of recovery? Club Med has been in trouble for almost a decade. Its boss for the past 18 months, Henri Giscard d'Estaing, son of Valιry Giscard d'Estaing, a former French president, has cut the firm's net loss in the first six months of this year to 4m Euro, from 29m Euro in the first half of 2003. But Mr Giscard d'Estaing expects Club Med to continue to leak money for a while, showing a profit only in 2006.

That matters little, says Mr Espalioux, given Club Med's likely "positive impact on our image and the overlap between our clients." Club Med is much better known than Accor. Some 80% of Club Med clients are also customers of Accor, whose businesses includes Ibis, Novotel, other budget hotels, various casinos and restaurants and the world's biggest restaurant-voucher firm. Arguably more important is the fact that Messrs Espalioux and Giscard d'Estaing are friendly. This, claims Mr Espalioux, will help the two business partners to get the best out of each other.
Most analysts think that Accor is wasting both time and money on Club Med. Accor should focus on budget hotels, its solid, core business, they say. Buying Premier Lodge, a budget-hotel chain in Britain, would have been a far more sensible acquisition, says Ian Rennardson of Merrill Lynch. But Premier Lodge is not glamorous - and not French.