IHG's share price could double through merger: Marcato Capital

(Adds comment from Intercontinental, details; updates share prices)

By Svea Herbst-Bayliss

BOSTON, Nov 11 (Reuters) - Activist hedge fund Marcato Capital Management on Tuesday again urged InterContinental Hotels Group to merge with a rival and said a tie-up could help the company's share price more than double.

The $3.5 billion San Francisco-based hedge fund owns a 4 percent stake in the hotel group, which also owns the Holiday Inn and Crowne Plaza brands. Marcato Capital Management publicly released its analysis because the hotel group's board has dismissed the fund's urging to combine with a larger operator.

An equity combination could deliver a premium upward of 100 percent over IHG's current share price, the fund forecast. InterContinental's U.S. share price jumped 3 percent to $40.36 in early afternoon trading after the analysis was made public. In London, the shares ended up 3.4 percent.

A merger with a "Tier A" strategic partner like Starwood , Marriott, Hilton, Wyndham, Hyatt or Accor (Paris: FR0000120404 - news) would create a company with global scale, allow for cost and tax efficiencies and boost the share price and earnings, the Marcato analysis said.

"Our analysis demonstrates that a combination could result in immediate, significant and abiding shareholder value - much more than is likely to be created under IHG's current business plan," Richard McGuire, Marcato's founder, wrote in an open letter to IHG shareholders.

Other investors include Fidelity Management and JP Morgan Asset Management.

In a response, IHG said that it had met with Marcato twice in recent months and reviewed the hedge fund's analysis, but "concluded that it remains in the best interests of all its shareholders to continue to pursue its current strategy for high-quality growth and delivering strong operational and financial performance."

After months of trying to persuade IHG to consider a tie-up, Marcato in August hired Houlihan Lokey as a financial adviser.

A U.S.-based hotel operator had earlier approached InterContinental, a person familiar with the matter said.

In the letter, McGuire wrote: "IHG has dismissed our suggestions and it appears they have neither solicited offers nor performed the rigorous analysis necessary to evaluate potential options to achieve this goal."

McGuire, a former partner at William Ackman's Pershing Square Capital Management, has returned an average 10 percent per year since launching Marcato four years ago. (Reporting by Svea Herbst-Bayliss, additional reporting by Kate Holton in London; editing by Dan Grebler and G Crosse)