UK: Successfully Managing A Hotel Portfolio Transaction

The last year or two in particular have seen a number of hotel portfolio sales by some of the large hotel operating companies. This trend has been increasing and several portfolios have either been sold in the last year or are on the market for hundreds of millions of pounds. This trend is part of the separation of "bricks from brains" that is believed to be the way that hotel operating companies can release capital from their asset-heavy balance sheets and improve their overall return on capital employed.

These disposals in the past were often accompanied by a lease back of the hotel property. More recently, the trend has leant heavily towards sale-and-manage-backs - the disposal of the property assets and business accompanied by a management agreement back to the operating company.

Managing a large portfolio disposal (and it is usually the seller that drives the process) can be very different from a single asset disposal. They are complex and time-consuming - even more so if the portfolio is located in more than one jurisdiction.

There are a number of considerations that both sellers and buyers of hotel portfolios should bear in mind to ensure a smooth and successful transaction:

• For the seller, it is vital to anticipate the needs of prospective buyers and give them comfort by providing them with a reassuring level of due diligence, and yet foster a competitive bidding environment that should deliver optimal offer prices.

• For the buyer in an auction process, it is important to demonstrate that it can provide the best offer, not just in respect of price, but also deliverability and credibility, two factors that will be important in a seller’s assessment of the offer. This must be done under pressure not to incur significant expenditure in case the offer proves to be unsuccessful.

To read the full article for tips on how you can manage this process to your advantage, please see below:

Full Article

The last year or two in particular have seen a number of hotel portfolio sales by some of the large hotel operating companies. This trend has been increasing and several portfolios have either been sold in the last year or are on the market for hundreds of millions of pounds. This trend is part of the separation of "bricks from brains" that is believed to be the way that hotel operating companies can release capital from their asset-heavy balance sheets and improve their overall return on capital employed.

These disposals in the past were often accompanied by a lease back of the hotel property. More recently, the trend has leant heavily towards sale-and-manage-backs - the disposal of the property assets and business accompanied by a management agreement back to the operating company.

Managing a large portfolio disposal (and it is usually the seller that drives the process) can be very different from a single asset disposal. They are complex and time-consuming - even more so if the portfolio is located in more than one jurisdiction.

There are a number of considerations that both sellers and buyers of hotel portfolios should bear in mind to ensure a smooth and successful transaction:

• For the seller, it is vital to anticipate the needs of prospective buyers and give them comfort by providing them with a reassuring level of due diligence, and yet foster a competitive bidding environment that should deliver optimal offer prices.

• For the buyer in an auction process, it is important to demonstrate that it can provide the best offer, not just in respect of price, but also deliverability and credibility, two factors that will be important in a seller’s assessment of the offer. This must be done under pressure not to incur significant expenditure in case the offer proves to be unsuccessful.

Portfolio sales normally result from an owner’s decision to put the portfolio on the market and it is therefore the seller that drives the process and sets the parameters for the transaction. However, in order to make the transaction run smoothly and to maximise the price received, a seller should always anticipate a buyer’s requirements and remove any problems, hurdles or risks that would otherwise cause a bidder to reduce its offer price.

On a sale and manage back transaction, a seller will not be selling to a competing operating company so the portfolio is likely to be targeted most heavily at financial buyers such as private equity houses, structured finance teams of banks or consortia of private investors, or even more than one of these. There are conflicting interests between a trade seller and a financial buyer in how the auction process is run and this is a fine balance for the seller to manage.

A seller will want to maintain competitive tension by keeping multiple bidders in the auction process right up to the end of the disposal process if possible. This will keep up the price and ensure no dilution of the contractual terms negotiated with the buyer over a long period of exclusivity. In contrast, a financial buyer will not want to incur significant expenditure in the auction process until it knows it has some form of exclusivity to minimise the risk of wasted costs on an unsuccessful bid.

Both of these concerns can be met to some extent if a seller is able to provide bidders with a significant level of due diligence already undertaken on their behalf. This might take the form of:

• Certificates of title to the hotel properties

• Financial due diligence report on the hotel businesses and operations

• Surveys (structural and environmental)

It is also possible to see seller’s legal due diligence reports or tax opinions being made available, especially if there has been some complex pre-sale restructuring.

It may appear that providing all these reports can increase the seller’s expenses. But financial buyers will incorporate acquisition costs into their financial model. If the buyer recognises the cost savings available, a seller should see higher offer prices.

If the seller is providing such reports to a buyer, it is important that the seller agrees with the firms providing the reports that they will address their reports to the buyer, the buyer’s equity investors, the buyer’ lenders and any other members of the lending consortium. Too often this is not addressed up front and there are last minute arguments about the extent of the addressees. Failure to have these reports addressed to all these entities may prevent the lending bank from being able to syndicate the debt, thus affecting the buyer’s ability to complete the transaction.

A bidder for a portfolio does not need to worry as much about structuring the transaction process, but is more concerned about presenting the best offer to the seller in order to win the auction.

Obviously the best offer will usually consist of the highest price, but a seller may be considering other factors, such as deliverability of the price and the transaction; the robustness of the offer (i.e. is it subject to many vague assumptions); the speed at which the bidder can complete; and, in sale-and-manage-backs particularly, the identity of the ongoing owner of its hotels, as there will be a long term relationship between the new owner and seller as manager of the hotels. A bidder should determine which of these factors is most important to the seller and structure its offer to satisfy these requirements.

There will always be tension between the need to advance the transaction process as much as possible to demonstrate commitment to the offer, at the same time without incurring significant costs that may be wasted if the bid is unsuccessful. Any bidder who does commit to incurring advisers’ costs in order to advance the process and get ahead of other bidders can significantly improve their chances of winning the auction, especially if their price is competitive. Sometimes arrangements can be made between seller and bidders to ensure that bidders are able to advance the process in a competitive scenario, such as a contract race, without significant risk on costs.

For a portfolio seller, spending the time and resources in advance of the auction will be time and money well spent in minimising timetable and price slippage once financial buyers do engage. For a buyer, identifying the seller’s key priorities and delivering against them will assist in winning the, now hotly contested, auction. For both, having the right advisers to help manage and conduct the process is vital in ensuring a smooth and successful transaction for all involved.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 01/11/2006.