Editors Note: Arthur Andersen's Hospitality and Leisure Executive
Report features hospitality industry new and trends in each issue. Industry
professionals in Arthur Andersen offices around the world will be contributing
on a regular basis to this feature.
Julia Felton, Manager
Hospitality and Leisure Knowledge Services Group / Arthur Andersen
Summer 1998
Hoteliers Feel the Effects of Asia's Financial
Crisis
It is nearly six months since the financial crisis hit the Asian markets,
but the impact has caused a global ripple throughout the hospitality industry,
cutting tourist flows and forcing Asian companies to put investment plans
on hold. Some examples of the impact are illustrated below:
-
Figures from the World Tourism Organisation reveal the number of tourists
from Japan, Korea and other parts of Asia fell by 2 percent last year rather
than the anticipated 6 percent growth.
-
Bankrupt Halle conglomerate of South Korea was forced 10 sell two Californian
hotels to Sunstone Hotel Investors Inc. for US$16.5 million.
-
Hilton International recently announced that operating profits fell in
the region by 29 percent from £35.1 million to £25.0 million,
however strong perfor-mance in other markets led to an overall rise.
-
Bass has noted that revenues per available room in its Holiday Inn properties
in the region have fallen by 12 percent in dollar terms as a result of
both the weakening of the economies and devaluation of currencies.
-
Hong Kong and Shanghai Hotels have made provisions of US$73 million against
potential losses from delays in various development projects in the region.
The company has also reduced the value of its property portfolio, following
a 30 percent decline in luxury property prices in I long Kong.
Yet More Industry Consolidation
Industry consolidation continues at a fast pace. Consolidation is not
just taking the form of outright acquisitions, but also strategic alliances
designed to increase market share. Some of the most noteworthy deals, of
the last quarter, are summarised below:
| The most talked about deal of the moment is Bass's acquisition of Inter-Continental
Hotels and Resorts for a reported £1.78 billion (US$2.9 billion).
The deal makes Bass a major player in the luxury market. Strategically
the companies are a good fit as Bass gains an established upscale brand
and strengthens its presence in Latin America and Europe where Inter-Continental
is strongest. |
| French group Accor has signed an agreement, which should lead to the
acquisition of 10 hotels from the Dutch chain Postilijon. The Postilijon
portfolio complements that of Accor, since it is concentrated on the east
and centre of the Netherlands, whereas Accor has a greater presence in
the west and south. The deal should make Accor a major player in the Dutch
market. Meantime, Accor has announced that it has decided to dissolve its
partnership with Spanish chain NH Hoteles. The partnership, formed in ~996,
had been designed to expand the Ibis brand in Spain. |
| Following the acquisition of Delta Hotels for US$70 million, Canadian
Pacific Hotels is now the largest manager of hotel rooms in Canada pushing
it ahead of Holiday Inns. Canadian Pacific will own or manage 22,000 rooms
worldwide and have control of approximately 6 percent of hotel rooms in
Canada. |
| U.K. based Stakis plc has entered into an alliance with Strategic Hotel
Capital Inc. (SHCI), a U.S. -based real estate company, following the sale
to SHCI of the lease on its London St. Ermins hotel. Stakis retains the
management contract and will use the proceeds of the sale to repay debt
and enable the group to expand. The acquisition is SHCI's first foothold
in the United Kingdom, but the two companies are planning further deals
in other U.K. cities. |
| Ladbroke, one of the unsuccessful bidders in the Gauteng casino license
awards, is reportedly in negotiations with Karos, a South African hotel
group, to acquire a strategic stake in the company and take over its six
management contracts. The deal, if successful, will provide Karos with
an internationally recognised brand, whilst helping Hilton to rapidly expand
its presence in the region following the opening of hotels in Durban and
Sandton last year. |
| In Australia, the Grand Hotel Group and the Australian Tourism Group,
two hotel and property companies, have merged to create a company with
£200 million in assets. Whilst Flag International, an Australian-based
marketing consortium, has decided to move its 420 member hotels onto the
Choice Hotels reservations system. The move follows the award to Flag of
the Choice master franchise in Australia, and solves Flag's dilemma that
its own reservations system was not year 2000 compliant. Will we see other
marketing consortia adopting a similar strategy in the future? |
| Munich-based Schoerghuber group and ITT Sheraton Corporation have signed
a joint venture agreement to form Arabella Sheraton Hotelmanagement GmbH.
Four Sheraton and 14 Arabella hotels will come under the new name. The
agreement significantly enhances ITT Sheraton's presence in Germany, where
Arabella has 12 hotels. The other hotels being located in Spain and Switzerland.
It is proposed that the Arabella Sheraton Majorca and the Arabella Sheraton
Grand Frankfurt will join the luxury collection. The rest of the portfolio
will move to the Sheraton brand. |
The Real Value of Brands
Following the appointment of Antoine Cau, the new chief executive of
Forte Hotels, Granada has announced that it is to expand the Meridien brand,
with 25 new hotels being built by the Millennium. The investment required
will be modest as the hotels will be built for third-party owners and operated
under management contract. At the same time some 22 unbranded hotels in
the U.K. have been put on the market. Cau realises that the "value of brands
is very important and that Granada has not been realising the full value
of the unbranded Forte hotels and have decided to concentrate on the branded
portfolio. ' Disposal of the unbranded hotels will provide Granada with
money to fund the expansion programme.
Meantime, U.K. Thistle Hotels has just announced the appointment of
Ian Burke (ex Holiday Hospitality) as its new chief executive following
the resignation of Robert Peel. The company has put thirty provincial U.K.
hotels on the market because they do not fit the company's core business
in the four-star market.
Global Casino Market Heats
Up
The global casino market is undergoing a rapid transformation as new
markets are opened up, however, some analysts believe consolidation in
the sector is about to heat up.
| Casino stocks in the United States have risen in recent weeks as investors
bet that the gaming industry will consolidate further. Several casino companies
have already received take-over bids since the merger of Starwood Hotels
and Resorts Worldwide and ITT Sheraton. Talk of consolidation has been
rife for some time as analysts believe that the industry is over-populated
and stocks undervalued. Potential acquirers are Hilton Hotel Corp., Circus
Circus Enterprises, Harrah's, and the various REITs. |
| In South Africa, following deregulation, both MGM Grand Inc. and Starwood
Hotels and Resorts Worldwide Inc. have been awarded gaming licenses. In
June Starwood will commence development of a US$175 million casino complex
in Johannesburg. Caesar's has already signed a deal to invest US$25 million
in the casino (25 percent stake). Meanwhile MGM Grand is planning a venture
with the Southern Sun Group to develop a US$300 million casino complex
in a Johannesburg suburb. A temporary version of the complex is planned
to open by the end of the year. |
| In Turkey, all 76 casinos have been ordered to shut down. Government
officials charge that the various gambling halls, most of which are located
in major hotels throughout the country, were havens for money laundering
and tax evasion. There are growing fears that this move will seriously
affect Turkey's tourism industry and possibly discourage further investment. |
In the United States…REITs Expand into Non
- Traditional Businesses
As the REIT market in the United States continues to grow and mature,
the denizens of Wall Street are looking for new ways to put this tax-advantaged
structure to work in non-traditional ways. Other than that of the widely
discussed (and often times misunderstood) paired -share variety, a REIT's
income needs to be derived directly from leases, financing, capital gains
and other direct real estate activity in order to qualify as tax-free entities.
Hotels, which derive income from nightly room rental, food sales and the
like need to insert a net lease structure between the operation and the
REIT. This structure is designed to transform a majority of the hotel's
income into a rental payment to the REIT landlord. This has the effect
of "cleansing" the hotel's cash flow and qualifying it as tax-free.
Inspired by the hotel REITs, a number of new REIT sponsors have identified
operating businesses that are similarly dependant on real estate but whose
income does not qualify under the REIT rules. Using a parallel net lease
structure. the market has witnessed the entry of pure play golf course
REITs (National Golf Properties, Golf Trust of America), entertainment
REITs (Entertainment Properties) and even a prison REIT (CCA Prison Realty)
REITs that own marinas, student dormitories, and forests will likely make
an appearance in 1998.
The granddaddy of real estate-laden operating businesses is, of course,
the gaming industry and its first foray into the REIT arena occurred earlier
this year with the US$1.7 billion acquisition of Station Casinos by Crescent
Real Estate Equities. Station added four hotel/casino properties in Las
Vegas, as well as two riverboats in Missouri to Crescent's already diverse
portfolio of assets that were primarily concentrated in office buildings,
hotels, cold storage and health care facilities.
Whether the Crescent purchase is a harbinger of an emerging REIT asset
class is yet to be seen. However, the casino market will be subject to
quite a hit of attention from the RElTs over the next year if for no other
reason than the sheer bulk of the gaming industry. One difficulty with
the establishment of net leases could be the relative volatility of casino
cash flow, particularly in the high roller market. Nonetheless, the transformation
of gaming and other real estate intensive companies represents a continuing
movement on the part of Wall Street to exploit the benefits of the RElT
structure to its fullest..
(Thomas P. McConnell, a Manager in the Firm's Hospitality Services
Practice, contributed to World Hospitality Briefs with the report on REITs.
He is based in New York.)
©Arthur Andersen |
