Burke's steerage

Thistle Hotels is being managed back to health. Andrew Sangster talks to its boss Ian Burke about his methods, and keeping shareholders happy.

Ian Burke, boss of Thistle Hotels, is not a hotelier's hotelier. Although he runs a company that has more bedrooms in London than any other chain, Burke is focused on keeping investors happy. He will chat about food and beverage or refurbishments as happily as the next hotel chief executive, but it is when discussing returns to shareholders that his eyes narrow and develop a steely glint.

This is perhaps not surprising, given that Thistle's biggest shareholder, BIL Investments, which has a 46% stake, has long been tipped as seeking an exit and leaving Thistle vulnerable to takeover. In fact the group was nearly bought up by Nomura in the summer of 1998, shortly after Burke's arrival.

But Burke has hung on, completing the biggest deal of his career to date, the £600m sale of 37 Thistle properties to property company Orb Estates last month. "It is a transformational deal," says Burke, pointing out that Thistle's balance sheet now has a net cash balance of £120m. With existing debentures of £260m, the company has around £380m to spend before even trying to borrow more. It is significant firepower.

Burke is secretive, however, about what he is going to do with the loot. "We will use it to develop the business in a way that is value-creating for shareholders or we will return it to shareholders," he says. "Our focus has been getting to the point of completion of this deal. We have no plans as of today."

This is, of course, management-speak of the first water. Nobody would work their socks off putting together a deal of this size without outlining at least a few options. But Burke knows that letting slip now would be a mistake.

City financiers have generally welcomed the deal. They see it as underpinning the value of Thistle's estate, hence its share price. More importantly, they also believe it is a transforming deal. Looking at Thistle's hotel assets on a per-share basis, the book value would give 240p. This deal valued the 37 hotels at close to book value (the price was just 2% or £13m lower) and this suggests that Thistle's current share price, languishing around 140p, is at something of a discount.

Analysts at Deutsche Bank believe the net asset value of the company, after adjustments, is 225p and that 170p is a fair value for the shares. At investment bank ABN Amro the numbers are markedly lower, with adjusted net asset value of 150p and the current share price of around 140p seen as representing fair value.

What both agree on is that the latest transaction is a good thing. In fact, it is probably as important as the £312m sale-and-leaseback deal struck by Hilton Group with the Royal Bank of Scotland in March last year. The advisers to this deal, Insignia Hotels, described it as a watershed in separating hotel operations from property. And now Thistle has entered the fray, unloading 31 regional and six London hotels, and taking the so-called bricks-and-brains split a step further.

The price achieved by Thistle compares favourably with other recent deals. According to ABN Amro, the multiple of the price paid by Orb is 10.8 times earnings before interest, tax, depreciation and amortisation in 2001. The analysts listed the various Forte disposals as being at 7.1 times and Scandic at 9.4 times.

According to Deutsche Bank: "There must (and should) be many other hotel companies looking at this structure as a means of crystallising value they believe the equity market doesn't recognise".

In the Hilton deal, the leases give significant obligations for the hotelier on the sold hotels. Although this was mitigated through the signing of leases that are related to turnover, Burke asserts that this deal remained essentially a refinancing exercise. With Orb, Thistle has sold the hotel businesses completely. "We have sold the burdens and the benefits of the hotels. The owner will enjoy the upside but it also bears the risk of the downside," explains Burke.

Thistle has given guarantees for the first 10 years of its 30-year management contract agreements but the arrangement is more arm's length. For example, apart from the general managers at the hotels, all the staff are now employed by Orb. Unlike the situation with leases where the obligations last the full term, after 10 years Thistle has no more risk. In aggregate, if the worst came to the worst in terms of hotel performance, Thistle would stand to lose £90m over the 10 years.

The deal has taken Thistle a step nearer to being a pure hotel management company, but Burke says there are no plans to complete the journey just yet. The company has about £1b of hotel property still on its books, including 16 hotels within central London and two other key properties. "Our priority is to seek means to improve operational performance by managing the hotels effectively," says Burke, sticking to the script.

And there remains much to put right at Thistle. Shareholders who bought-in when the company floated in October 1996 paid 170p and cannot be overjoyed at the lack of capital growth. "We're not satisfied with the return on shareholders' funds. This industry as a whole doesn't deliver," says Burke.

Unlike many hotel managers, Burke is able to speak with authority about other industries. He has just seven years as a hotelier, with stints in oil and Unilever providing a more rounded management background. He left his native Liverpool - roots he maintains by attending the occasional Liverpool FC match - to do a degree at Imperial College in London. He then joined Deloitte as a trainee auditor on graduation. Having gained the essential grounding in finance needed by any business professional, Burke joined Lever Brothers. "I gained great insights into customers," he says.

He remembers his next berth, at oil giant Exxon, for being very professional and financially astute. The company also put him through an MBA at the London Business School. He moved on to Gateway and then to his first brush with the leisure sector, at the former Bass (now Six Continents). He joined in 1990 and immediately had his eyes down looking after the bingo business Gala Clubs, his first role as a managing director.

The move into hotels was not a conscious push. He received a phone call from the senior honchos within Bass offering the post of managing director of the Europe, Middle East and Africa division of the then Holiday Hospitality. He was there from May 1995 until April 1998, looking after 34,000 bedrooms in more than 180 hotels. So why take the plunge from a senior management position in an FTSE 100 company to join the little-fancied Thistle?

Burke offers two reasons. First, it was the nature of the challenge and the opportunity he saw. Second, he wanted a CEO role. "The CEO sits between the product markets and the capital markets. Product is about getting excited in improving quality and capital markets are about delivering value for shareholders," he says. It is the involvement in the capital markets that Burke felt was missing in his Bass role.

Passionate Although he is passionate about the investor relationship side of the business, Burke has also thrown himself into more product-facing areas. He is a director of the London Tourist Board and also sits on the board of the British Tourist Authority. He has retained links with his old alma mater and is a member of the London Business School's UK regional advisory board.

Unusually for a hotel chief executive he is also passionate about technology. "It can change the guest experience and run the business more efficiently," he says. This belief has seen him turn Thistle from one of the most technologically backward companies - legend has it that before Burke's arrival the head office maintained records for each of its hotels using (stored in?) tea chests - into one of the industry leaders.

By putting himself personally in charge of the e-commerce effort, Burke is proud that Thistle is now able to guarantee guests will be offered the same rate through whichever channel they book - Internet, travel agent, by phoning the central reservation centre or direct to the hotel. And his efforts have been recognised by Thistle winning industry awards for its technological prowess. He believes there is still much to be done. "Airlines have been early adopters of technology, far ahead of hotels," he says. "Their percentage of bookings via the Web is much greater but no hotelier has more than 4% or 5%."

Technology is, of course, just one strand of the hotel business. Burke has worked hard to improve other areas such as food and beverage, leisure and conference and banqueting (C&B). Food and beverage reform saw him upgrade 20 restaurants, overseeing the introduction of innovations such as CoMotion coffee shops. With leisure he brought in an outside contractor, 3D Leisure, to bring in the expertise to operate 15 Otium leisure clubs, opened at a cost of £1.3m each.

This work, along with the upgraded C&B offerings that, for example, saw £2.5m spent on the 500-person capacity ballroom in the Thistle Tower, is now largely concluded. Also at completion is the upgrading of bedroom stock. All these moves have helped to improve the Thistle brand's rating in the UK from 17th to eighth place in the survey by BDRC, an independent monitoring body widely used by hotel companies.

In each of 1999 and 2000, £60m was invested in the hotels. This dropped to £38m last year and just £15m is planned for the current year - and this figure is for all 55 hotels, of which 37 have now been sold. (One other property, in Poole, Dorset, was already a management contract, also with Orb).

While Burke is not prepared to divulge exactly what Thistle is planning in the short term, he is happy to rule out the prospect of another property deal. Because London has suffered more than the provinces in the current downturn, the drops in yield on the remaining London hotels mean that selling them for a good price is difficult. "If the yields improve, then who knows what we'll do," shrugs Burke, implying this is clearly an option a few years down the track.

Thistle has suffered from the economic slowdown in 2001, compounded dramatically by 11 September, but Burke points out that the scenario for the industry as a whole is very different from the early 1990s. Cost structures are more flexible and inflation, interest rates, company debt and new supply are all lower. The storm is being ridden out and with this deal in place, Thistle looks much less of the takeover target it once did.

Burke maintains his lean frame by making the journey to work by bike at least twice a week and by fell walking. He has had to introduce a far more rigorous fitness regime at Thistle, but so far it is paying off.

Anatomy of the Orb Estates deal

• £600.4m, comprising £555.4m in cash and £45m through a loan note.
• Thirty-year management agreement to Thistle Hotels.
• Thirty-seven hotels in total, including six London hotels - Lancaster Gate, Bloomsbury, Hendon Hall, Cannizaro House, Kensington Park and Kensington Palace - and all Thistle's regional properties, except Edinburgh and Heathrow.
• EBITDA of sold businesses in year to 30 December 2001 was £55.5m.
• Book value of the assets at year-end was £609.7m.

Source: Thistle Hotels plc