Three weeks after 9/11 is a hell of a time to take on a new job in finance. And it’s a dreadful time to try to pull off a major corporate restructuring. When all this is happening in the hotel industry whose prospects had possibly been obliterated by an act of terrorism, it’s certainly a baptism of fire.

And so it was for Richard Solomons on 1 October 2001. Then the newly-appointed divisional finance director of Six Continents plc, Solomons had been given the task of heading up the demerger of the InterContinental Hotels and Britvic drinks business from the Bass pubs business.

“It was great timing,” he says. “We tore up the budget and started again.”

At that time, Solomons’s role was “to try and make sure we got the best possible terms in the demerger for the hotel business and, frankly, to try to keep all the hassles away from my operations colleagues so that they could get on with running the business,” he says.

Solomons had previous experience in doing these sorts of deals, which clearly helped. Though he had been finance director of Britvic for just over two years, he had spent seven years in investment banking with Hill Samuel in London and New York after qualifying with KPMG. But, as he admits, “From the inside it is always very different from advising from the outside. It is a very complex exercise. In hindsight, it was fun.”

You have to wonder: if it was fun in hindsight, could it really have been that much fun at the time? Either way, the process was finally completed in April 2003 when IHG listed on the London and New York stock markets, at which point Solomons got the group finance director job.

Two years later, the company sold Britvic and became a pure hotel play. In fact, it became a pure hotel play with almost no hotels. “We were changing the business model and going back to our core strengths,” Solomons explains. The company divested itself of most of its bricks and mortar ­ about £3bn-worth, in fact.

“We had 200 hotels when we demerged and now we are down to 18,” says Solomons. The IHG business model is now based on a combination of ownership, management and franchising ­ the last accounting for more than three-quarters of the group’s hotel rooms last year. “It’s much more resilient, much less volatile than owning hotels because you are taking a share of revenue most of the time, as opposed to the whole P&L.”

Brand benefits
From the 3,400 franchised hotels ­ trading under a number of brands including Holiday Inn, Holiday Inn Express, Crowne Plaza and InterContinental with around 450,000 rooms ­ IHG earns 5% of room revenue.

Over and above that, however, the company charges hotels for services such as marketing, reservations and the running of Priority Club Rewards, its loyalty programme. “In total, those assessments come to more than $800m a year,” says Solomons (the company reports in sterling, but dollars feature a lot in the statistics Solomons cites). “They are off P&L because they are effectively funds we invest on behalf of the brand and the owners. So all of our marketing is paid for in that way.” Good deal, getting other people to pay for the marketing that drives up your own revenue.

“That’s one of the nice things about the model,” Solomons explains. “It creates a big barrier to entry for other people because we are generating sums getting on for $1bn dollars a year from our system of hotels, which enables us to spend on marketing ­ internet, websites, frequency programme ­ in a way that a small brand or somebody not part of a big brand family just couldn’t compete with.”

IHG also manages 546 hotel properties, where it takes a percentage of total revenue as well as a share of the profits. It only fully owns around 18 properties, including the InterContinental Park Lane. IHG, therefore, gets the commercial benefit of having almost 4,000 hotels and 600,000 rooms in its network, without the balance sheet burden of actually owning them all.

But to get a handle on the size of the hotel empire, we ask, how big would the company be if it actually did own all its hotels?

“It is a near-impossible calculation to do,” says Solomons, but he points us in the direction of some P&L information. “In the first quarter of this year, we talk about total gross revenue of £2.2bn; that is effectively the revenues on which we charge fees. Our reported revenue in the quarter was £226m.” So the revenue that goes through the hotel network is around ten times as much as goes through IHG’s own accounts.

The balance sheet of an ‘all-owned’ hotel business would be proportionately even bigger. With around 600,000 rooms, IHG would have a balance sheet laden with “tens of billions of pounds” of hotels. As Solomons points out: “You couldn’t possibly build, manage, run, staff and maintain that number of hotels, so [franchising] enables you to drive at a scale way above what you ever could if you owned them.”