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Not too much of a stretch: The hotel business needs to generate growth
of 6 per cent a year indefinitely in its free cashflow to cover average cost
of capital of 10 per cent.
$1.72b
Raffles Holdings deal a win-win for all?
At a price tag of $1.72 billion, how much
does US private investment firm Colony Capital need to rake in from Raffles
Holdings' hotel business to justify the purchase of the hotel network?
That number, if it can be estimated, will
indicate if Colony Capital has bagged the deal at a fair price.
BT's calculations show the hotel business
needs to generate growth of just 6 per cent a year indefinitely in its free
cashflow to cover an average cost of capital of 10 per cent. From this
perspective, it's not too bad a deal for Colony. More of this later.
The transaction, we were told, represents
a 64 per cent premium to the net book value of the hotel business assets.
Looked at this way, the initial reaction was that Raffles Holdings is
getting a good deal.
But net book value captures historical
costs - that is the amount paid for by Raffles Holdings when it first
acquired or built the assets. Over the years, that value would have been
reduced by the amount of depreciation and amortisation charged annually.
In other words, that number does not
represent the worth of the assets. An asset's worth is determined by the
cashflows it can generate going forward.
And Colony has valued the transaction
assets at an enterprise value of $1.72 billion. This comprises an aggregate
cash consideration of $1.45 billion for Raffles Holdings, the assumption of
pro forma net debt of $220.7 million and pro forma minority interests of
$53.4 million as at Dec 31, 2004.
Now let's work through some of the
business numbers to see how Colony can justify the $1.72 billion price tag.
According to Raffles Holdings, the hotel
business had a turnover of $527.8 million and earnings before interest, tax,
depreciation and amortisation (Ebitda) of $89.7 million for the year to Dec
31, 2004. Its net profit before tax, minority interest and extraordinary
items amounted to $32 million.
From the numbers, we can roughly work out
the free cashflows available to all the claim-holders in the group,
including stock-holders, bond-holders and banks.
The free cashflow to the group can be
derived by taking the earnings before interest but after tax, adding back
depreciation and taking away capital expenditure and increase in working
capital.
Raffles Holdings' depreciation is about
$50 million a year. And assuming that capital expenditure plus increase in
working capital amounted to some $23 million, the rough estimate of the free
cashflow to the group worked out to about $59 million for 2004.
Given the expected rebound in the hotel
industry both in terms of room rates and tourist arrivals, let's assume that
this $59 million number can grow by 20 per cent to $71 million this year.
From then onwards, the cashflow would have to grow at least 6 per cent a
year indefinitely for the deal to make sense for Colony. That's assuming
that Colony's weighted average cost of capital (WACC) is 10 per cent.
If its WACC is 12 per cent, then the
cashflow growth rate would have to be 8 per cent a year.
For comparison purposes, CapitaLand's
WACC was 7.3 per cent in 2004.
So if Colony is able to ride on the
emergence of the Asian economies, and also create synergy between Raffles
Holdings' hotel business and its own, then perhaps it has indeed paid a fair
price for the assets.
Meanwhile, the earnings yield of Colony's
$1.72 billion investment would come to about 4.1 per cent this year based on
the free cashflow estimate of $71 million.
From the perspective of CapitaLand, which
owns 60 per cent of Raffles Holdings, if it is able to deploy the funds and
generate a yield in excess of 4.1 per cent, then it too makes sense for it
to sell the hotel assets.
In short, it may turn out to be a win-win
deal for all - not least the minority shareholders of Raffles Holdings who
saw their shares jump by 33 per cent yesterday - the day after the deal was
announced. - by Teh Hooi Ling
BUSINESS
TIMES 20 July 2005
Raffles sells 41 hotels for $1.45b
 
Raffles Holdings is selling its entire
hotel business of 41 properties, including Singapore's 118-year-old Raffles
Hotel, for $1.45 billion cash to a US private-equity investor, retaining
only its interest in the multi-use Raffles City complex.
Under the deal, Los Angeles-based Colony
Capital will pay a 64 per cent premium above the hotel business' net
tangible assets, and Raffles Holdings will net a gain of $605 million and
keep its 45 per cent share in Tincel Properties, which has a $700 million
stake in the Raffles City. The complex houses Swissotel and Stamford hotels,
Raffles City Shopping Centre, Tower Blocks and Convention Centre.
Analysts agree that the sale, which will
give Raffles Holdings shareholders a special 40 cent dividend - a total of
$816 million - is a good deal, especially as Raffles Holdings will get to
keep Swissotel Stamford and Raffles The Plaza.
Colony, a fund that focuses on real
estate, owns among other assets, the Amanresorts hotel chain, London's Savoy
Group, and casinos in Europe and Atlantic City in the US. The buy will add
15 Raffles and 26 Swissotel hotels and resorts in 35 countries to Colony's
portfolio, of which 14 are owned by Raffles, including Singapore's Merchant
Court Hotel and Raffles hotels. The rest are management contracts.
Colony will also assume Raffles Holdings'
debt and minority interests of about $274.1 million.
Raffles Holdings will have an option to
buy Raffles Hotel at market value after 82 years - the time when the tenure
of that part of the hotel which has a 99-year lease runs out. The entire
property consists of the land on which the hotel is built, which has a
999-year lease and the Arcade section, which has a 99-year lease.
The deal is likely to be approved by
Raffles Holdings shareholders, as 59.7 per cent shareholder CapitaLand will
vote in favour of it. CapitaLand will get a dividend of 18 cents per share,
according to one analyst's estimate. CapitaLand chief executive Liew Mun
Leong said the company will decide if it wants to issue a special dividend
closer to its financial year-end in December 2005.
'Raffles definitely got a good deal,
which is on the high side, based on the last-known numbers,' an analyst
said. 'If you value Raffles Hotel at $100 million, that's close to a million
a room.' But analysts say the hotel could be valued at $200-$300 million.
UOB Kay-Hian analyst Pratik Burman Ray
said in a note yesterday: 'Our previous RNAV estimate of $2.35 for
CapitaLand was based on the market of 68 cents for Raffles Holdings. With
the present deal putting the value of Raffles Holdings close to 86.2 cents
per share, we are revising our RNAV upwards to $2.43 per share (upward
revision of 3.4 per cent).'
Raffles Holdings' shares closed at 68
cents and CapitaLand at $2.39 on Friday last week and were suspended from
trading yesterday pending the announcement. They will resume trading today.
Colony said it plans to maintain all
operations under the current brands and will look for opportunities to grow
the franchise, especially in Asia.
'We are honoured to become the custodian
of one of the finest hotel chains in the world and a true national treasure
of the people of Singapore,' Thomas J Barrack, chairman and chief executive
of Colony Capital, said in a statement. 'We deeply respect the historical
significance of the Raffles Hotel, Singapore and we consider it our
responsibility to protect that legacy. We are delighted Jennie Chua has
agreed to remain as chairman of the Raffles Hotel Singapore to provide
continuity and support our efforts,' he said.
Ms Chua said about 30 to 40 staff will
remain at Raffles Holdings and a committee will be formed to consider what
to do with the proceeds and where to take the company.
'We have a lot of ideas what to do,
including going into the mixed-use development, and other ideas which, right
now, is prudent for us not to mention until we are ready,' she said. 'We
will go to the board for approval after we have a business plan.
Fundamentally, anything that will make money, gives us the correct yield and
within our area of expertise and management capability.'
As for CapitaLand, it will use the
proceeds for retail developments and other projects, Mr Liew said. He denied
speculation that Ascott Group, its serviced-apartment business might be up
for sale as well.
'Ascott today, outside the USA, is number
one in the world. So I am already in pole position. It is much easier for me
to develop it,' he said. 'We're already there, it's a matter of growing it.
For Raffles to be in the top ten, it's a lot of core capital, it's a lot of
competition. So why should I divest Ascott? And Ascott's call for capital is
much lower than the hotel business. Hotels are expensive.'
Another analyst said the deal was a fair
one for Raffles because it could be 'as good as it gets'. 'It's very
difficult for them to build the brand,' he said.
'It'll take another 10, 20 years before
it becomes a Marriott or a Four Seasons, and it's a painstaking task. Once
you unlock the share value, and this deal is good in that sense, that you
call it a day.'
CSFB is adviser to the Raffles-Colony
deal. - by Jean Chua BUSINESS
TIMES 19 July 2005
Raffles Holdings Limited announced that it has entered into a definitive
agreement to divest its Hotel Business to Colony HR Acquisitions LLC, an
affiliate of Colony Capital LLC for an enterprise value of US$1 billion,
subject to adjustments upon completion. Raffles Holdings is selling its
entire hotel business of 41 properties, including Singapore's 118-year-old
Raffles Hotel, for US$859 million cash to Colony Capital, retaining only its
interest in the multi-use Raffles City complex. Under the deal, Los
Angeles-based Colony Capital will pay a 64 per cent premium above the hotel
business' net tangible assets, and Raffles Holdings will net a gain of
US$352 million and keep its 45 per cent share in Tincel Properties, which
has a US$407 million stake in Raffles City. The complex houses Swissotel and
Stamford hotels, Raffles City Shopping Centre, Tower Blocks and Convention
Centre.
More to RHL-Colony deal than meets the
eye
Even as the dust settles on the
mega-divestment of all the hotels business of Raffles Holdings Ltd and as
shareholders pat RHL's management on the back for a job well done, it's
worth pondering the flip side of the coin: why did US-based Colony Capital
pay such a huge premium in the first place?
Stated differently, is there more to the
deal than meets the eye? More than a simple sale of hotel assets by one
operator to another?
On Monday, RHL surprised the market with
news that it is to sell all its hotels including the iconic Raffles Hotel at
Beach Road for $1.72 billion in cash and debt to Colony - a price tag that
represents a 64 per cent premium to net tangible assets.
High premium
Now, consider that most of the time,
hotel and property stocks trade either at or below their net asset value.
For most such counters, the debate among analysts is usually what a
reasonable discount could be, given that the assets in question are usually
illiquid and disposal is typically difficult.
Of course, this is the Raffles we're
talking about - one of the best hotels in the world, and a brand name that
arguably commands a premium. And you might also argue that in order to get
full control of all of RHL's assets that took years to build up, some sort
of premium can be expected. But 64 per cent?
Colony is no stranger to the hotels
business. The US-based company is essentially a private property investment
firm that started out in 1991 with US$1.25 billion in investors' cash.
According to a press report on its website, it has since raised US$4.5
billion to buy hotels, casinos and movie theatres.
Last year, Colony spent US$1.24 billion
buying casinos in Chicago and Atlantic City. In December, it took a 15 per
cent stake in a European consortium which, according to the accompanying
press statement, is a 'major casino operator that aims to be a European
leader'.
In a magazine interview, Colony's chief
executive recently outlined a strategy that involves a major push into the
gaming industry to capitalise on the pressures within the industry for
players to consolidate.
Interestingly, a Sept 1, 2004 article in
the Los Angeles Times describes the company as having a good track record in
buying assets, 'then ditching them at a profit'. The article also says:
'That's Colony's business: scouring for undervalued or distressed properties
that it can overhaul and eventually resell to earn the 20 per cent-plus
annual returns its investors have come to expect.'
Still, it's unlikely that turning a quick
profit is the intention with the RHL deal, given the size of the premium
paid and the fact that RHL was far from a distressed asset. However, it is
worth bearing in mind Colony's track record of owning hotels and casinos,
and, if the US press is to be believed, its penchant for selling out as soon
as possible.
More likely in the case of RHL is the
possibility that Colony has forked out a substantial sum to gain a foothold
in the local casino scene, which is expected to take off before the end of
this decade.
Handy cash hoard
Will Colony or its new vehicle RHL join
hands with RHL's parent CapitaLand in the race to build Singapore's first
integrated resorts (IR) with casinos? CapitaLand has teamed up with two
strong contenders - MGM Mirage and Kezner International - to bid for the two
IR sites separately.
The iconic Raffles brand and RHL's
post-divestment, post-dividend cash hoard of $600-odd million will
definitely come in handy for any casino foray.
One thing's for sure: there's more to the
RHL-Colony deal than meets the eye. There will surely be more deals -
probably casino related - to look forward to. -
by R. Sivanithy BUSINESS
TIMES 20 July 2005
A great lesson in unlocking hidden value
Although there may be initial
disappointment over news that a national landmark like the Raffles Hotel is
to be sold to an American party, it has to be said that if there was any
'correct' way to unlock value in parent Raffles Holdings Ltd (RHL),
yesterday's announcement of a divestment of all its hotel interests
totalling $1.7 billion is as good as it gets.
To be sure, the sale isn't totally
unexpected. In fact, management had in its latest annual report said it
intended to pursue an 'asset-light' growth strategy - surely a hint at what
it had in mind.
Furthermore, the hotels business has
always been notoriously difficult, requiring large capital outlays in return
for largely uncertain revenue streams that are vulnerable to small changes
in economic well-being and to unpredictable events like terror attacks and
natural disasters such as last December's devastating tsunami.
It is therefore not surprising that
investors generally tend not to be inspired by hotel stocks. The Straits
Times Index, for example, which bases membership largely on liquidity and
hence market interest, many years ago included several hotel components but
now does not contain a single one.
This loss of interest in the sector has
been evident in RHL's generally lacklustre stock price performance since it
listed in December 1999 at 85 cents per share. Although the company last
year undertook a capital distribution and capital reduction worth 18 cents
per share, it would be fair to say that if there had not been intense
speculation about the possibility of a casino deal - which benefited all
property and hotel-related counters during the first few months of this year
- RHL's shares would still be stuck somewhere in the region of 40-50 cents.
All of which is a roundabout way of
saying that for years, RHL was viewed by the market as being rather boring -
a well-run company in a competitive business whose shares were not going to
collapse but, by the same token, wouldn't get the pulses racing.
Not any more though. If the sale to
US-based Colony Capital goes through as planned, there are exciting times
ahead not just for its shareholders but also those of parent CapitaLand.
When RHL shares resume trading - probably today - the price should reflect
optimism about the deal, though how much higher they might trade is
difficult to gauge.
One way of obtaining a ballpark fair
value is to add the 69 cents per share in cash the company is getting for
its hotel operations to the proportionate book value of its 45 per cent
stake in Raffles City, the latter being RHL's only remaining asset.
This is the approach taken by local
broker UOB-Kay Hian, which arrived at a figure of around 86 cents per share.
Since this is about 26 per cent higher than the pre-suspension price of 68
cents, shareholders have an immediate windfall to look forward to, if they
decide to sell.
Similarly, CapitaLand shareholders have
also something to smile about via their 60 per cent stake in RHL. Apart from
the upward boost to net asset value and earnings, the dividend that RHL is
paying works out to about 18 cents per CapitaLand share.
The company hasn't yet said if it intends
to distribute all the cash it is to get from RHL, but chances are that some
portion will find its way into the pockets of CapitaLand shareholders.
Finally, the question of what lies ahead.
Apart from a 45 per cent share of Raffles City, RHL will be sitting on a
nice, post-dividend cash hoard in the region of $600 million for use in ways
that it deems fit. A special committee has been appointed to evaluate
investment options, and already there is speculation about where a casino
might fit in.
We don't know what the future might hold
for RHL but we do know that if any other company wishes to unlock hidden
value that may not be fully reflected in its share price, it can't go far
wrong if it follows the RHL approach. - by
R. Sivanithy BUSINESS
TIMES 19 July 2005
An icon is an icon no matter who owns it
Can a Singapore icon be owned by
foreigners? Jennie Chua, Raffles Holdings CEO believes so. 'Customers,
guests don't care who the owners are,' she said yesterday. 'And the staff,
who will continue to work under the same management, are also equally
comfortable. The fact is that it will always be a Singapore icon because
it's here and because it will be managed by the people who are here.'
The Raffles Hotel will be sold to Colony
Capital for US$1 billion as part of a package of 15 Raffles properties and
26 Swissotel hotels and resorts. Some members of the community will decry
the loss of a national monument, but in fact the US-based company will just
be the latest in a long list of owners of one of the world's best known
hotels.
In 1887, the Armenian Sarkies Brothers,
who were the proprietors of another fabled hotel - the Eastern &
Oriental - in Penang, decided to open a hotel in Singapore. The location was
a 10-room old bungalow owned by Arab businessman Mohamed Alsagoff.
The hotel quickly expanded. And even
after the Sarkies Brothers lost control of it during the Great Depression of
the 1930s, the Raffles Hotel managed to survive by going public. The land,
however, still belonged to Alsagoff family.
Leslie Danker, Raffles Hotel guest
relations manager and an employee since the 1970s, recalls that Mohamed
Alsagoff inserted a proviso in his will that stipulated the land could not
be sold until his last male heir died. This happened in the early 1960s, and
the land was sold to Malayan Banking, founded by Khoo Teck Puat. By this
time, the management of the hotel had fallen into the hands of OCBC Bank. Mr
Danker also remembers that Tan Chin Tuan, then OCBC's managing director
then, managed to persuade the board of directors that there was a conflict
of interest because Malayan Banking also owned the Goodwood Park Hotel, and
Malayan Banking later bowed out, selling its stake to DBS Bank.
The owners may have changed, but as a
piece of real estate the Raffles Hotel is safe. 'You can't dig it up and
plant it elsewhere,' says Ms Chua. Apart from her assurances, the hotel is
also protected by the Preservations of Monuments Act. In 1987, when the
future of the hotel was in the balance, the Raffles was gazetted for
conservation. In 1995, when restoration and extension work was completed, it
was designated a national monument.
The Preservation of Monuments Board (PMB),
a statutory board of the Ministry of Information, Communications and the
Arts, has strict rules on preserved buildings. On the Raffles, a PMB
spokesperson said: 'Its building should be preserved according to the
regulations safeguarding a national monument whether the hotel is owned by
local companies, government-linked companies or foreign companies. This
includes the retention of the name of the building. The name of the hotel
should be retained as Raffles Hotel because it is a part of Singapore's
history and heritage.'
And the Raffles Hotel is not the first
national monument to be owned by a foreign company either. Just this June,
the old Thong Chai Medical Hall was sold to another US-based company for
around $7 million.
CapitaLand CEO Liew Mun Leong notes that
some of the world's best-known architectural icons like Harrods in London
and the Rockefeller Center in New York are foreign-owned. 'And who knew that
the Plaza Hotel in New York was owned by Singapore's Kwek Leng Beng?'
CapitaLand is the parent company of
Raffles Holdings. Mr Liew says he 'supports the transaction', adding: 'We
cannot make an investment or divestment based on an emotional business.' He
also reveals that since the hotel fell into the hands of the group in 2000,
there has always been talk of divestment. 'If we are emotional, we cannot be
a developer,' he adds. -
by Arthur Sim & Wee Li-En BUSINESS
TIMES 19 July 2005
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