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Bank on a rethink over investment strategies

25 October 2007 by
Bank on a rethink over investment strategies

The Northern Rock affair has shaken many businesses out of any complacency they might have had about investments. So what now? Nic Paton reports

Last month London hotelier Elizabeth Smith was among the thousands who patiently queued for half the night to withdraw savings from the beleaguered Northern Rock bank.

Smith joined 500 savers outside the bank's Golders Green branch, explaining to waiting reporters: "I got up at two this morning because I couldn't sleep. I'm here for my mother. She's 88 and terrified, because we're talking about her life's savings in this bank."

While Smith and other savers' money was subsequently guaranteed by the Bank of England, the hospitality sector as a whole is also now having to take a long, hard look at who is minding the family silver in the wake of the global credit crunch.

For a few years now, the sector has presented rich pickings for private equity investors. Chains of all sizes have been more than happy to hand over ownership in return for much-needed investment, financial clout and management expertise.

Squeeze on supply

But with private equity deals normally debt- or credit-heavy - "highly leveraged", to use the financial jargon - any squeeze in the money supply could potentially hurt the sector badly.

Already, there have been signs of financial wobbles. Last month Marylebone Warwick Balfour revealed that it had delayed the sale of Malmaison and Hotel du Vin until financial conditions became more stable. And in August, O'Neill's and All Bar One operator Mitchells & Butlers said that it was holding fire on a joint property ownership scheme with Robert Tchenguiz's investment vehicle R20 for much the same reason.

The choppy financial climate also led Royal Bank of Scotland in August to postpone, for a second time, its sale of a £1.1b package of Hilton hotels - although latest indications are that they are back on the market.

Robert Milburn, head of UK hospitality and leisure at PricewaterhouseCoopers, said that buyout activity had certainly slowed, but added that deals would not stop completely.

"Lenders are becoming more cautious and the private equity buyers are more discerning in what they look at," he said. "But does that mean they will be going out of the sector? I don't think so."

What we are unlikely to see in this new climate, Milburn said, is huge deals such this summer's £10b takeover of Hilton Hotels Corporation by US private equity giant Blackstone.

In hindsight, that deal may come to be seen as the private equity high-water mark, in the same way as the flotation of Lastminute.com after the turn of the millennium marked the peak of the dotcom bubble. Whether, like Lastminute, it also presages the bursting of the bubble is too early to tell.

"A lot of private equity activity has dried up," according to Sam Hart, analyst at stockbroker Charles Stanley Securities. "We have really not seen any deals over the past couple of months."

But, like Milburn, Hart is ultimately optimistic. "The consensus is that probably we are now over the worst of it," he said. "I think we might start to see a pick-up in activity towards the end of this year, but it will not be as frenetic as the levels we saw in the first half."

Deals to do

It is clear, too, that there are deals to be had out there. Last month saw Inventive Leisure sell freeholds in nine bars to property investor Aprirose for £17m, and Whitbread make a £44m swoop on hotel chain Golden Tulip, which is part-backed by private equity firm Graphite Capital. In addition, JER Partners recently picked up Morethanhotels for £115m.

Mark Sheehan, managing director at property agent Coffer Corporate Leisure, said that, historically, private equity owners have tended to hang on to their investments in the sector for about five years.

In the febrile atmosphere of the past year, that timescale shortened. Now, though, with the outlook less certain, it might readjust back - and, in terms of the stability of the sector, that might be no bad thing.

"We may see them staying in longer, but I do not think we will see them leaving the market," Sheehan said. "And it may be that people are more cautious about what they buy."

The changes to the capital gains tax regime announced by Chancellor Alastair Darling in his pre-Budget report earlier this month will also hit the market in the short term.

From April next year, the tax payable on profits from the disposal of shares will rise from 10% to 18% - and this could lead to a rush of mergers and acquisitions activity to beat the deadline, Sheehan said.

"Going forward, it may not make a scrap of difference," he said. "But in the meantime, we could see a flurry of activity."

Private equity is here to stay >>

Wagamama to abandon stock market listing >>

Whitbread Golden Tulip deal will not be the last >>

Read more news on private equity here >>

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