Brands Over Bricks In Four Seasons Deal

Some of the hottest commercial properties today are hotels, which are teeming with guests and investor demand. But a recently announced multi-billion dollar privatization shows that branding is equally (if not more) important than bricks and mortar in the eyes of a buyer.

On Monday, ritzy hotelier Four Seasons Hotels Inc. (NYSE: FS) announced plans to go private in a $3.37 billion buyout. But Four Seasons, which many people consider the most luxurious hotel brand in the world, owns just one hotel outright.

Saudi-based Kingdom Holdings International and Bill Gates’ Cascade Investment LLC are teaming up with Four Seasons’ founder and chairman Isadore Sharp on the deal. If Four Seasons shareholders clear the sale, the takeout price would represent a 28% premium over last Friday’s closing share price.

The offer bodes well for other high-end lodging companies that either own real estate or operate asset-light, including big names such as Hilton International (HLT), Starwood Resorts (HOT) and Intercontinental Hotel Group (IHG). While none are officially on the market, many observers believe that buyers are eying them as takeout targets. Analyst Harry Curtis of J.P. Morgan Securities believes that two of those companies — Hilton and Starwood in particular — could command higher buyout offers due to their “significant real estate assets.”

But lacking a core portfolio of owned assets may not matter. Four Seasons, which is, after all, essentially a franchise company, owns just one of the 71 hotels that it manages.

“[This deal] just stirs the pot one more time for more private bids to come for other companies,” says Amit Kapoor, research analyst at Gabelli & Co. based in Rye, N.Y. “But real estate heavy companies will continue to be in the cross hairs of private buyers for their real estate.”

Many hoteliers have exploited soaring property values by going asset-light. Kapoor says that the strategy typically involves selling properties, retaining as many management contracts as possible and freeing up capital for share buy-backs. Intercontinental has been doing this for the past three years — the company sold $4 billion in assets during that period — and Starwood followed a similar path earlier this year. Hilton Hotels Corp. has sold more than 25 Hilton-owned hotels for upwards of $1.5 billion since launching its disposition strategy in late 2004.

The Four Seasons deal should give the public-to-private trend added momentum, too: Private players still have incredible buying power due to historically low interest rates. And the chance to gain exposure to one of the real estate market’s hottest sectors is hard to resist.

Private equity firms have increasingly targeted hotel chains over the past four years. Fairmont Hotels & Resorts Inc. went private earlier this year for $3.3 billion. Kingdom Hotels and Colony Capital teamed up on that deal. In 2005, private equity giant Blackstone Group shelled out $15 billion on hotel acquisitions.

Short-term yields don’t really matter to these buyers. Most private equity firms hold a company for roughly four to seven years before selling it. The Four Seasons deal is no exception. According to JMP Securities analyst Will Marks, the buyers will generate a puny 2.5% unleveraged return on this investment. But their rich offer, which values the company at a multiple of 40 times 2007 EV/EBITDA should make it harder for any competing interests to outbid them.

One piece of good news: Four Seasons reversed last year’s third quarter loss by posting a $10.9 million profit for the third quarter 2006. The earnings announcement, which was made earlier today, compares to a loss of $11.4 million during the third quarter of 2005. Revenue per available room was also up 9.7% compared to the third quarter of 2005.

“The valuation is indeed staggering,” says Gabelli analyst Kapoor. “This buyout trend will continue. We like Intercontinental which is another [almost] pure manager and franchiser. And, at the other end of the asset spectrum, real estate-heavy Orient Express Hotels (OEH).”

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